The stock markets of the world have dropped quite a bit since the beginning of the year and the newspapers are full of gloom and doom. One well-known analyst for a big bank even wrote an article that basically said “Sell everything”. If we believed him, we would have a deep depression or worse, so this couldn’t have been realistic advice.
What is actually happening?
The stock market looks forward, so it responds to any changes in the future or if it thinks there will be any changes in the future and there have been two big such changes recently.
No, it is not the oil price – that is what is happening now and that is actually positive for most stocks in the world.
The first change in expectations is about China. We have been taking the amazing growth story of China for granted and have accepted that the Chinese government is very good at managing this growth. These hopes have been dashed. The Chinese government has made a number of big bungles in trying to manage its stock market but, more importantly, it is becoming clearer and clearer that one man in China, Xi Jinping is accumulating more and more power and, through his big corruption drive, is making it clear that nobody is safe from the early morning knock on the door.
A very centralised government is a very brittle government. If that government also shows itself to be making mistakes, many people start to re-evaluate the future. It is a bit like deciding to build a house with your brother and then realising that your brother has become quite irrational and erratic. No house has been built yet but our future expectation has changed quite dramatically.
One big group of people who seem to have changed their minds are Chinese investors themselves. Some 700 billion dollars left China in 2015. This could either be people protecting their assets against the anti-corruption campaign or those Chinese investors who have lost faith in China or, quite likely, both.
The other big change is that US interest rates have gone from basically nothing to 0.25% above basically nothing. Again, that is a tiny change but the world has been running on free money given out by the central banks in the US, Europe and Japan. Even the possibility that this flow of free money will stop has made many people re-evaluate the future.
Personally I think it is great that saving money is rewarded even a little bit again but even the possibility of good times ending has made a big difference to investors’ expectations. Hence the falls in the stock markets.
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