What is happening in the stock market?

9th August 2011

Global equity markets have sustained more heavy losses this week. Concerns that the US may be facing another recession and worries over Europe’s debt crisis are seeing markets fall.

As the market has become less confident about the forecasts for economic growth, it has become more sensitive, increasing market volatility.

Does this affect my investments?

Ian Copelin, Investment Director, my wealth comments, “Falling stock market values do have a negative impact on client portfolio’s but I am not going to overreact to this weakness caused by short-term newsflow, as that is not a well-reasoned market outlook as we are concerned with long-term investments. We look at trends in company earnings, and these are still seeing positive revisions.”

Shall I remain invested?

Ian Copelin, Investment Director, my wealth comments, “I have never been more certain that global equity markets will rally strongly from these levels. My view is, as economic growth picks up (as it did summer/autumn 2010) it will take the equity market up with it. Falling oil prices and the end of disruption to the supply chain caused by the Japan earthquake will soon stimulate economic growth which should in turn prove positive for stock markets.”

Is now the right time to invest?

Paul Morton, Investment Planning Director, my wealth comments, “Companies have been reporting increasing revenues and forecasts are continuing to follow this trend. Following the equity market falls, share prices are now looking very cheap.

Holding cash, or equivalents, during volatile markets may be comforting; however, cash is not a good long-term investment. With interest rates on the majority of deposit accounts below inflation, cash is certain to depreciate in value.

History tells us equities (shares) will almost certainly outperform cash over time and by holding cash at this point you are betting you can time the move back into equities when the market rallies.

Whilst it is impossible to time the best entry point to the market, you can be sure, share prices are cheap and you are paying less now for businesses which have not fundamentally changed in such a short time period.”

What happens next?

It should be remembered that the US economy grew at a 1.3% annual rate during the second quarter of 2011. Also, a year ago, global equity markets fell around 15% as investors speculated the US economy would contract.

Ian Copelin, Investment Director, my wealth comments, “A year ago, I remained confident during the drop, and was proved right as global equity markets rallied strong (20+%) from their August lows. In the US, the S&P 500 earnings are forecast to rise 18% this year and by 14% next year.

It should be noted that more than 75% of US companies that have reported earnings for the second quarter of 2011 have exceeded earnings estimates – with total income topping projections by a massive 5.2%.

The combination of falling prices and rising profits has driven the price-to-earnings ratio down, making equity valuations look very cheap.”

Paul Morton, Investment Planning Director, my wealth also comments, “If any clients have any further concerns, then please do not hesitate to contact your Adviser”.