Investors around the world are facing turbulent times as the stock market continues its downward trend. The US markets have fallen for three consecutive weeks, raising concerns among analysts who predict a potential 50 percent plunge in share prices. This would not only disrupt the US economy but also have a global impact, causing a significant loss of wealth.
The recent performance of the stock market has been dismal. The Dow Jones index experienced its worst day since March, plummeting nearly 400 points. The S&P 500 fell by 1.47 percent, while the Nasdaq, known for its heavy concentration of technology stocks, is down almost seven percent in the month of September alone.
The economic worries that plague the US are numerous. New home sales have fallen by 8.7 percent in August, according to the Commerce Department, indicating a decline in the housing sector. Additionally, consumer confidence expectations have dropped to recession levels, as reported by the Conference Board.
One major concern is the potential for the US Federal Reserve to continue hiking interest rates in order to combat inflation. While rates were kept steady at 5.5 percent in September, Federal Reserve Chair Jay Powell’s warning of more hikes to come has raised anxiety among investors. JPMorgan CEO Jamie Dimon even cautioned that interest rates could reach seven percent, an action that could potentially trigger a global recession and significantly impact the markets.
In the face of these uncertainties, investors are turning to bonds, which have seen yields as high as six percent per year. This return, the highest since 2007, provides a decent alternative to equities without the accompanying risk. The “higher interest rates for longer” approach adopted by the Federal Reserve has prompted investors to shed high-risk assets such as stocks, causing the already tumultuous market to worsen.
Investors are growing increasingly risk-averse due to persistent inflation, which has led to a decrease in appetite for risky assets. The specter of a US government shutdown due to the failure to pass a short-term spending bill also adds to investor worries, denting confidence in the nation’s credit rating and economic outlook.
The global concerns continue with the recent default of Chinese property giant Evergrande on a £450 million debt repayment. This development has cast a shadow over the world’s second-largest economy and added to the mounting uncertainty in financial markets worldwide.
Amidst this turmoil, the UK’s FTSE 100 index has surprisingly fared well, with a 2.2 percent increase so far in September. The Bank of England’s decision to hold interest rates at 5.25 percent, signaling they have reached their peak, has provided some relief to investors.
However, analysts caution that the FTSE 100 is not immune to the potential consequences of rising US interest rates and a worsening economic outlook. Despite its relatively steady performance recently, it may still be vulnerable to market fluctuations.
As investors grapple with the current market conditions, some may view these struggles as opportunities to invest. However, experts recommend sticking to larger companies and “defensive” stocks in order to navigate the ongoing turbulence in the markets.
While September’s market woes may only be a temporary setback, investors should prepare for the possibility of further deterioration in the coming months, particularly in the US. As the year draws to a close, market participants may look forward to an interest rate cut in 2024, which historically has been followed by positive equity returns. Nonetheless, caution is advised, and a focus on more stable investment options is recommended to weather the storm.
Sources:
– Commerce Department,
– The Conference Board
– CFRA Research
– Chris Beauchamp, Chief Market Analyst at IG
– Pierre Veyret, Technical Analyst at ActivTrades
– Victoria Scholar, Head of Investment at Interactive Investor
– Mathieu Racheter, Head of Equity Strategy Research at Julius Baer