And they say a week in politics is a long time. Just look at the financial markets since I wrote my last blog on the 15th October. I said then that markets fear the worse and then recover. And this would appear to what has now happened. On Friday Stock markets across Europe surged and the Footsie posted its biggest advance since February after the Bank of Japan announced a surprise stimulus programme. This set off a wave of optimism that saw the dollar strengthen even after the US Federal Reserve ended six years of its own fiscal stimulus.
When governments through their central banks use a financial stimulus, they do so to give the economy a boost. So the financial markets tend to react positively to the news. We have seen this in the UK, and the US since the banking crisis at the end of 2008. The European Central Bank has done the same more recently. However, when this ‘boost’ is no longer required, as we see now in the US, then the Federal Reserve stops the money supply. This is a sure sign that the economy is picking up, and therefore the help is no longer required. And if you look at the GDP figures coming out of the US, this backs up the Feds decision.
Is this and end to the volatility then?
No is the simple answer. There still remains a lot of uncertainty out there. Not least the political issues that I spoke about last. But what this latest rally by the markets does demonstrate is what I said right at the end of my blog on 15th October, which is do nothing when markets are ‘heading south’
It’s ironic that one of the issues that really spooked the markets in October was commodity prices and in particular the drop in the price of oil. I say ironic because for years in the West we have been brought up on the notion that rising oil prices were bad for the economy. And we saw them fall and this was blamed for markets falling. Generally, and I say this because it depends who’s opinion you listen to, but falling oil prices is a sign that industrial demand is weaker. And so a sign that factory out-put will fall. But the positive flip side to this is whilst your global equities may take a tumble, the cost of petrol at the pump will come down. Which we have also seen.
I reiterate my last bit of advice when we saw the volatility in the markets in October that you just have to ‘stay the course’ and not get too concerned in all of this. The markets will do what they do. And there is very little you or I can do about it. What I would say to any client is that if you are concerned about volatility then lower your attitude to investment risk profile. Similarly if you have recently decided that you may be thinking of taking early retirement for example, then let me know well in advance, particularly if you need access to your funds.