Many of our long term clients have shrugged off the recent news about the falling FTSE. They have lived through far worse times and they know that equity markets are skittish and unpredictable animals that historically return to sanity once they have had a blow-out.
However, the unpredictable short term nature of markets can make them worrying all the same.
At the point of writing, the FTSE has fallen from 7,778 points on the 12th of January to around 7,199 today. This represents a drop of around 579 points (-7%) or so.
Should we be worried and why has this happened?
The main reason behind this recent sell off is actually about strong employment and growth figures coming out of the United States (US). The US economy has been enjoying a good time (as Mr Trump loves to keep reminding us!) since the new presidency. This swell has been down to low interest rates vs. higher wage growth.
This simple equation means that there has been plenty of money in the system.
When there is lots of money in the system, people go out for pizza! They also take car loans, move house and invest in equities. In short, markets LOVE free money supply.
When this starts to happen, central banks like the Bank of England (BOE) and the US Federal Reserve (FED) step in. Their job is to prevent the economy from overheating and so they attempt to choke off or ‘taper’ the money supply. They tend to do this through an interest rate hike.
Currently, I believe we are seeing a ‘taper tantrum’ of sorts from the US stock markets. The FED is now being second guessed by the markets. They are expecting a rate rise – so they are responding negatively.
Whenever US equity markets sell off, other global equity markets like the FTSE 100 tend to do the same.
As our domestic UK indicator, the FTSE 100 is sensitive to the price of Sterling. The Pound has fallen in the past few weeks which may actually help speed a recovery for our own equity market as our large exporters enjoy a further competitive advantage on the global stage.
All of this talk about equity market indexes is horribly one dimensional. I celebrate (I think!) 20 years of being a financial planner this May. Over the years I have seen two key factors that lead to long term growth. These are diversification and dividends.
It is possible to still grow a clients’ portfolio when indexes are flat or have fallen back a bit. Our client reviews are really showing the value of this at the moment as we can point to the power of ‘negative correlation’ and not investing all the eggs in the one FTSE related basket.
I wanted to put this article out to just say that we are here for you 100%. I think we may be in for some volatile weeks ahead following the recent positive news from the US – but we will come through it in good order. If you have any concerns – please just pick up the phone.