Back in October I wrote about the potential for ‘corrections’ (marked, but not severe, falls) in share prices in 2018, commenting that the US equity markets in particular had become over-priced. The past week has seen such a correction - of some 9 per cent to the FTSE-100 - materialise with global equity markets taking their cue from Wall Street.
The immediate cause of the fall in prices was higher than expected wage inflation data in the US. This prompted fears that the Federal Reserve Bank will tighten monetary policy by raising interest rates. For a market that was distinctly edgy in the first weeks of 2018 this prospect spooked the US markets and the rest of the world’s equity markets followed by sharply marking down share prices. As usual when Wall Street has a nightmare the rest of the world screams!
In the UK the Bank of England’s Governor, Mark Carney, reinforced the pessimistic tone by indicating that interest rates in the UK could rise earlier and by a greater amount than previously forecast as a result of the apparent buoyancy of the UK economy and the related increase in inflationary pressures.
Expectations of rising interest rates hit both bond and equity markets – and, indirectly, the property market too. Beneficiaries are those holding money in (variable) rate savings accounts or in other cash forms. With no risk of capital loss and with interest earnings expected to rise such investors seem best placed to benefit from the market developments of recent days. For the first time in years the adage ‘cash is king’ seems to be highly apt.
But will this correction in share prices turn into a crash? The likelihood is not. Whilst inflationary pressures are rising in many economies the monetary authorities are ‘on the case’ and early moves to tighten monetary policy will dampen inflation expectations and help calm equity and other financial markets.
February 2018 will, I think, be remembered for a sharp correction in equity prices worldwide but not a crash.
Martin Upton
Director, True Potential PUFin
1February 2018
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