What's going on?
Markets around the world threw a wobbler on Thursday and Friday, startling investors who’d been looking forward to riding a wave of further record-high stock prices into the holiday season…
What does this mean?
It’s tough to tell exactly what started it, but European stocks fell more than 2% last week (their worst week since August) and US stocks snapped an eight-week winning streak. Of particular note was a selloff of bonds issued by riskier companies (these are often called “junk bonds”). Two such companies had to cancel plans to borrow more money via new bonds, highlighting the fact that investors are getting more cautious – they aren’t willing to lend to just any old company right now.
Why should I care?
The bigger picture: The environment, overall, remains supportive for global stocks.
The world’s biggest economies – Europe, the US and China – are all growing at a reasonably good clip, which supports companies’ ability to make money. Meanwhile, certain central banks, like the European Central Bank, are still providing a historically extreme level of support to their economies (and, by extension, financial investments) – and this feeds through into the global economy and markets worldwide. So while stocks and other relatively risky investments may have a wobble from time to time, the underlying environment gives investors reason to be optimistic.
For the market: The main issue may be that stock prices are reflecting such a high degree of optimism.
A moderate two-day selloff after such a strong preceding 12 months is hardly worrying news – stock prices never go up in a straight line! But investors are well aware that current stock prices are near record highs relative to companies’ underlying profits. This creates a greater risk that stocks will eventually sell off quite sharply, as they creep further from a price that most investors would view as “cheap”.