After recent losses, and subsequent gains, the markets are again down as a result of continued concern over debt and a slowdown in global economic growth.
The stock market had been reassured by comments from the US Federal Reserve which outlined their judgement that interest rates will remain low well in to 2013, whilst at the same time ruling out the immediate use of more Quantitative Easing (QE).
In Europe, the European Central Bank (ECB) had sought to ease concerns over the Euro Debt Crisis by purchasing Spanish and Italian Government Bonds in order to reduce the both countries’ borrowing costs.
Today (Wednesday), Bank of England Governor, Mervyn King announced a reduction in the forecast for economic growth for 2011 to 1.4%, with inflation predicted to peak in the Autumn at 5%. He was however, more optimistic on economic growth and inflation going into 2012.
The actions of both the Federal Reserve and ECB have had the effect of calming fears over the global economy, but this appears to have been short-lived. We hope that further measures will be introduced in the coming months by all central banks to bring a more long-term solution to slowing global growth and debt concerns in the Eurozone.
For investors, the message remains clear: The original reasons for investing are still relevant. Periods of stock market volatility will appear over the course of a long-term investment and whilst it is understandable that many of you will be concerned about the value of your investments and may seek to ‘cut your losses’, the fact of the matter is that this will almost certainly mean you lose money and your ISA allowance, without giving the markets time to recover. Investing is about time, not timing.
Why are the markets falling?
It has been widely reported that recent stock market volatility over the past week has been largely down to concerns over the amounts of debt carried by countries such as the US, Spain and Italy. The US has been particularly prominent due to the protracted agreement to raise the debt ceiling and Standard & Poors’ decision to downgrade US debt.
In Europe, there have been fears that both Italy and Spain could be in a situation similar to that of Greece, requiring an injection of capital in order to meet debt repayments. This has further raised questions over the Eurozone’s credibility as a single economic entity.
Both debt worries and a slowdown in economic growth have made institutional investors nervous, culminating in a sell off that has seen stock markets fall by nearly 20% since last week.