The index of the UK’s leading shares – has fallen by over 100 points this morning, following heavy selling on Wall Street last night. Shares have been on a relentless march higher since the end of the last big sell-off nine years ago, so what’s caused the change of heart?
For the last decade we’ve seen very low interest rates in both Europe and the USA, meaning that investors have been keen to buy stocks. This has seen share prices rise phenomenally – at the end of February 2009, the US benchmark index – the Dow Jones – stood at just over 7,000 points. Earlier this month it reached record highs of almost 27,000. In London the rise on the FTSE-100 since 2009 has been from around 3,500 to above 7,900.
The problem now is that interest rates are starting to rise and the market expects this trend to continue, especially in the USA as the Federal Reserve needs to keep hiking rates as it tries to limit inflation. The picture is however further clouded by the fact that global trade tensions risk hitting economic growth across the board. Right now, markets are taking a reality check that with this backdrop, many shares are overvalued, hence the heavy bout of selling.
It is however always worth remembering that stock markets have historically been cyclical. We could be in for a turbulent time ahead, but history shows us that in the long term, and especially once dividends are taken into account, the overall trend for the stock market has always been positive.