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Stock market falls - Armageddon, or business as usual?
The stock market has been enjoying one of its best-ever upward runs. At the moment, however, we're seeing some potentially worrying falls, writes John Andrews
The headline writers love it – billions wiped off the values of our biggest companies, they say. As the UK grapples with the aftermath of the floods, along comes another set of woes to keep us all awake at night.
What's happening? The latest theories go like this. Earlier this year, the first cracks appeared, in the Far East. The Chinese market looked like a bubble about to burst, but decided to let out some air instead. Down it went, but not catastrophically. Around the world, investors re-assessed their own markets. America's previous chief banker declared that there was a one-in-three chance of entering a recession in the next twelve months. The US housing market looked decidedly wobbly; it still does - and now, house prices are falling in parts of Britain. Lower house prices mean people don't feel so well off; they decide to keep the car for another year and put off buying that high definition TV. Mix in a few more uncertainties into this soup, and all of a sudden clouds start to appear in the blue skies of the finance world. In the other main economies, the characters may be different, but the basic story is more or less the same.
Doomsday just around the corner? Time to sell out and head for the hills? Before we panic, let’s remember some words by Mark Twain: history doesn’t repeat itself, he said, but it often rhymes. Saga readers, who have witnessed a bit of history themselves, will appreciate the wisdom of this remark.
What we’re seeing here is something we’ve seen over and over again, and it’s a manifestation of what really drives share prices: the fact that any market represents the aggregate beliefs, fears, hopes, analysis and conclusions of an extremely large number of human beings. Even the most clear-headed and rational of us is driven by a mixture of emotions that can bring a tremor to a steady hand.
No-one in the investment world, amateur or professional, really knows why markets behave the way they do. When they go up we get excited and when they go down we get scared. We are subject to irrational exuberance and, sometimes, unwarranted despondency. And many investors simply don’t like to be seen making mistakes; so, if they think the tide is turning, they prefer to jump in and swim with it, in the same direction as pretty much everyone else. In essence, that is why every market can be a rollercoaster.
For now, don’t be too surprised if we see more uncertainty, quite possibly more large falls. But look at the fundamentals: has so much changed since the beginning of last week? Not really. If you have a well-diversified portfolio of investments – not just shares, but also cash, property and non-traditional investments too, in proportions appropriate to your own situation – you’re in a good position to ride out this storm.
* Dr John Andrews is a British investment management consultant and writer. His views are personal, and you should always consult a professional investment adviser.
