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This is what markets do

There was a massive sell off on global stock markets last week, with markets around the world showing massive declines. In an era of continuous news coverage, this was a dream for the producers as they had something to report on. There’s nothing like a bit of panic to get people to tune in to see what’s happening. And there’s nothing like a sharply declining graph to keep people glued to the tv.

What happened?

It all started in the US. Their economy is doing very well at the moment. They are almost at full employment and tax cuts, for both companies and people, have just come into effect. The markets got spooked that the economy was being boosted by the massive corporate tax cut (it went from 35% to 21%). This caused concern that the economy would overheat and the Fed would increase interest rates to cool things down. Another factor was the increased need to borrow to offset the tax cuts and the cost of this borrowing.

Should I be worried?

You have to remember that the markets are not the economy. Markets react to news all the time, some of which has no impact on the day to day running of the companies you may be invested in but it will affect its share price. People didn’t buy less Dominos pizzas over the weekend or stopped going to Disneyland because the stock price of these companies fell.

The drop also coincided with a blackout period for companies buying back their own shares, something that historically has led to lower returns from equities.

Many commentators say that the correction seems more technical in nature, that is the market is correcting itself, and that the fundamentals for future growth are still there.

Keep an eye on your long term goal

Your investment strategy should not change at all. This is what happens in equity markets. You cannot have ups without downs. People thought Brexit would be a catastrophe, it was a blip. In 2016, people were worried about the noise coming out of China, markets recovered and growth continued. Even though Greece is 1/30th the size of Apple, in 2011, the Greek crisis had a massive negative effect on global markets. But markets recovered and the fundamentals were still strong.

These things happen in markets and they recover. They will of course be events like 2008. The key is to have have the correct investment strategy to start with; minimum 5 year investment term, know what level of risk you can afford to take and don’t worry about the ups and downs.

If you have any questions, send me an email at [email protected]

Steven Barrett

12 February 2018