Market slide

19 March 2008

It seems that the laws of gravity apply just as much to stock markets as they do to physical objects. When it comes to share prices, what goes up, must also come down.

That was exactly what happened in week 30, with the global stock markets’ five-month winning streak coming to an abrupt end. The trigger for a while, but the end of July finally saw investors lose their nerve, with a broad sell-off that saw markets suffer their steepest one-day falls for several years.

The lifting sector was caught up in this, Dropping from a record high of 719.25 points in week 29 to 665.52 in week 30, a fall of 7.5% in a single week. But over the month the IC Share Index is still in the black, up 1.74% from its position at the end of week 26.

The same was true for the Dow, but both the Nikkei and FTSE were down sharply from their positions at the end of June. The FTSE came off worst with a 5.57% fall, and this illustrates a curious phenomenon in that investors outside the US seem to react with much more panic to bad news about the American markets than domestic traders do.

One of the theories about this relates to US trade deficit. US Census Bureau statistics show that the balance of trade was -US$ 764 billion, which is to say the US imported US$ 764 billion worth of goods and services more than it exported. This implies that a downturn in the US economy is actually worse news for the rest of the world than it is for the US.

Outlook

As IC went to press it was not clear how deep or severe the stock market dip would be. Initially it was certainly steeper than the previous two, which the markets bounced back from fairly strongly.

It is also worrying that the reason for this most recent slide - a bursting credit bubble that has been long in the making - is a more fundamental issue than the last two corrections. The falls of February and last May were more about straightforward profit taking, when share prices had become over-inflated.

Having said all that, the global economy remains strong. The only area of serious concern is the US, while elsewhere developed and developing countries alike continue to enjoy strong economic growth.

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