09 Aug Sudden sharp fall in stock prices, across the world

5th August 2024
Sudden sharp fall in stock prices, across the world

What has just happened?

You may have heard on the news or in the newspapers over the last few days that stock markets across the world have been hit by a fall in share prices. Particular attention has been given to the Japanese stock market which has fallen by over 10% in the last week, and the US Technology Index – the NASDAQ which has fallen by a similar amount.

The reason for the sudden sell off in stocks was that last Thursday, the US Federal Reserve (the equivalent of our Bank of England Monetary Policy Committee) decided to leave US interest rates unchanged. This position differed from the Bank of England who cut interest rates here by 0.25% on the same day, and the European Central Bank which had cut interest rates by a similar amount last month. The very next day, last Friday, fresh data from the US showed that new jobs created was significantly lower than had been expected. This has caused markets to fear a recession in the United States – with the inevitable knock-on across the developed world – and hence the flight to safety and away from equities.

The reason for the significant falls in Japan and the US Technology NASDAQ Index are that Japan is heavily dependent upon the US economy for its exports, whilst the NASDAQ holds technology stocks that are particularly volatile and rely on a growing economy. Their fall has been exaggerated by the fact that there had already been significant gains over the last 12 months in that area.

What may be done?

The markets are now pricing in a 100% chance of an interest rate cut at the Federal Reserve’s next meeting in September. The only question is whether that cut will be for 0.25% or even 0.50% in an effort to stave of the risk of recession in the United States. However, the markets are also pricing in a 60% probability that the Federal Reserve won’t wait until September but may instead make an emergency interest rate cut within the next week. Alternatively, if the Federal Reserve does not wish to act in quite such an emergency fashion, then we can instead expect a statement from them indicating that interest rate cuts are on their way in the US shortly. The purpose of such measures would be to calm the markets and reassure them the Federal Reserve has not left the cutting of interest rates too late and is not “behind the curve” and caught sitting on its hands whilst the US economy falls towards recession.

Will stock prices recover and when?

I personally believe that there has been a significant knee-jerk reaction to the disappointing employment figures on Friday in the United States. The old adage that “Stock markets are rational in the long-term but irrational in the short-term” could well be being proved yet again here. Whilst it may take a short while for the markets to overcome its shock, I do believe that, certainly if the Federal Reserve takes some action as discussed above, we may see the panic recede and stock prices re-build themselves. For those investors looking to put money into the markets, this could be a significant opportunity to “buy the dip”.

Have all asset types been affected?

Stock markets across the globe have been badly affected, particularly in Asia. UK markets have been hit, though not as severely as in Japan and some other areas of the world.

In contrast, Corporate Bonds and Government Bonds have risen in capital values quite significantly. The expectations for future interest rates are that there will be a series of cuts, particularly following on from the Bank of England’s decision to cut rates last Thursday. Instead of Central Banks focusing on fighting inflation, they now appear to be on the edge of making an abrupt pivot to staving off recession.

Inevitably, we have also seen Gold prices increase (always the flight to safety when markets are fearful). The Swiss Franc has also risen in value against other currencies as investors look to place their money in what are viewed as the safest possible havens.

Should I take any action?

Although events are moving pretty quickly, and it is hard to determine exactly where the landing position will be, I would suggest that investors grit their teeth through this (probable) short-term hiatus. As I say, I do expect Central Banks, particularly the Federal Reserve, to take positive action and try to calm markets before they get further affected. For the braver investor, this represents a good buying opportunity.

As ever if you have any questions, or wish to discuss your investments, markets or any other issues at all then please do contact me.

Please note these are the views of Christopher Charles Financial Services Ltd, and are for background information only. They do not constitute advice, nor should action be taken without specific advice, pertaining to individual circumstances.Investments can fall as well as rise in value, and you may not get back as much as you invested, particularly in the short term. E & O E – figures are produced with great care, but no liability whatsoever can be accepted for any errors of information within this document. Past performance is not a guide to the future. Christopher Charles Financial Services Ltd is authorised and regulated by the Financial Conduct Authority.

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