2017 marked a good year for many investors as the, generally, bullish stock markets paid dividends (I hope you see the pun here!) to investors globally. Investors involved in international share trading generally enjoyed strong markets worldwide. Despite a turbulent political period where the US policies and presidency at times seemed to threaten the market, investors got a considerable return.
However, only 5 months into the year and the stock markets have been quite unpredictable. Globally, we have had 2 key stock shocks as listed below.
February 2018 saw the Dow Jones Index lose 4.6% in one day and setting off a worldwide bear-run in the stock markets. The index plunged 1600 points, the largest decline in history in a single trading day. The index recovered though, with investors buying at the reduced share prices but the Dow still closed 1,175 points down, recording the Dow’s largest drop in history! Be that as it may, this was not by any means a crash. Markets worldwide were actually higher than they were 2 months before.
There are a number or reasons for this plunge in the market. Interestingly, one of the reasons for this plunge was actually news of a stronger US economy. With lower levels of unemployment in America than in other countries such as Britain, the typical American worker’s wages had grown by 2.9%. Why? The law of demand and supply applies here. When it’s harder for firms to find workers, they(workers) have a higher bargaining power in negotiating salaries.
But how does this affect stock markets? More-so, how does this affect the stock markets negatively? Well, you could think of it as a chain reaction. If workers are being paid more, then there’s a possibility of increased inflation. This in turn leads to higher interest rates to counter said inflation. Consequently, this pushes up bond yields, making them more appealing (as their risk is lower) to equity securities.
The integrity of the American stock market has a huge bearing on the performance of indices all over the world. This is because markets all over the world function on a key assumption: the US inflation rate will remain low. The Federal Reserve can then maintain low interest rates as per this belief. This explains how the sudden plunge in the Dow affected markets all over the world.
March 2018 saw the Dow plunge by more than 1000 points. This was the result of the increasing apprehension of a potential trade war between the US and China. The fears of the trade followed Trump’s (President of the US) aggressive tax policies on Chinese goods. The president asked his officials to investigate the possibility of increasing trade tariffs on up to $US150 billion of Chinese goods. The two countries make up the world’s two largest economies. Investors are then cautious of the effects such an event could have on stock markets.
This saw multiple indices fall. The Dow (based in the US), Nikkei 225 (Tokyo Stock Exchange), Topix (Tokyo Stock price index), Kospi (Korea Composite Stock Price Index), Hang Seng (Hong Kong), S&P/ASX 200(stock market index on the Australian Securities Exchange) all fell 1.77%, 3.59%, 2.88%, 2.25%, 3.09% and 1.9% respectively.
The relation between the fall and the potential trade war is more straightforward than the previous stock shock. We have already established that the US market’s performance has a bearing on other indices all over the world. Stock prices are a reflection of a company’s financial performance as well as its prospects. Consequently, a trade war may negatively affect sales of companies. Investors are then cautious of the prospects of companies.
With all the current political tension in the world, this may prove a turbulent year for stocks. Investors may need to be more actively invested in managing their portfolios this year.