Making Sense of the FTSE 100 and Wall Street Fall & Recovery 2018

stock-exchangeYesterday the FTSE suffered its biggest fall since the Brexit vote as a wave of pessimism swept across global stock markets.

However, within 24 hours Wall Street bounced back and the FTSE with other European markets quickly recovered much of the lost ground.

I do not profess to be an expert in equity markets, but I’m cognisant of the indirect impact that they can have on my clients as a barometer of general consumer and corporate sentiment.

Notwithstanding the mini-correction of the past few days, if we look back over the past ten years, the FTSE 100 has doubled since its nadir in March 2009. In this period, the UK has seen steady GDP growth, modest inflation, improved productivity and falling unemployment and it makes sense that these improving fundamentals are reflected in the markets.

However, we cannot overlook that, to a significant degree, the economic recovery has been underpinned by the life support machine of the loose monetary and fiscal policies that have become the norm in the aftermath of the banking crisis.

Low interest rates, tax incentives and quantitative easing have helped to stimulate growth but questions are increasing being asked as to the sustainability of these stimuli or the extent to which they have masked the underlying situation, leading to artificially high corporate valuations. Interestingly, a number of commentators at the weekend referred to psychology and herd mentality trumping rational valuation metrics.

Locally, nationally and globally, we face a number of political and economic challenges over the coming months. Will concerns over inflation and rising interest rates see the correction turn into a full-blown bear market or will we see a return to the status quo underpinned by continued earnings growth.

Recently a number of clients have asked whether I’m concerned about a deeper correction or volatility? No is the simple answer.

As Warren Buffet says “widespread fear is your friend as an investor, because it serves up bargain purchases”.