It looks like we could be seeing a major direction change in the markets right now. For the past couple of months equities have been gaining strength, pushed up by generally positive news about the US economy. The past week has shown some hints that might be changing, though. The Dow Jones Industrial Average started the week with a series of rapid up and down movements before settling on down as its direction of choice, whereas the FTSE 100 just sank steadily. The result was a significant move from equities to gold.
As usual it’s hard to pin down one cause for a shift like this. There are lots of potential culprits and it’s likely that all of them have played a part. For example the ongoing Ebola epidemic has made many people reluctant to travel, so airline stocks are down. The French economy is on the rocks thanks to misguided economic policies that have driven capital out of the country, and that’s impacting some major French-based companies. Even oil seems to be on a downward trajectory as US shale oil production increases, with Brent crude close to a four year low. The US Dollar has slipped back slightly after climbing strongly against the other major currencies, although it’s still in a strong position and is likely to hold that for a while. The Federal reserve has just downgraded its growth forecasts for Germany and Japan, suggesting that the Euro and Yen won’t be gaining strength any time soon, and China has its own problems. The IMF has joined in with its own reduced growth forecast and a prediction that the Eurozone could be facing a new recession.
The biggest reason for the stock market’s woes, however, seems to be a growing feeling that many shares are overvalued. Again the IMF backs this belief, describing current values as “frothy”. UK bank Coutts think investors have taken the chance to “sell the rally” and cash in on high prices while they last, and the aftermath of that can be seen in last week’s major slump. Overall it’s estimated that close to $1.5 trillion was wiped from stocks over the period.
The upside of all this is that it sets the conditions for future growth to be more sustainable. The Fed, which has been muttering about an interest rate rise for months, isn’t likely to move forward with that in the new climate so new financing should continue to be available at reasonable rates. US employment figures continue to look good although there are some questions about how many of the new jobs created this year are full time and sustainable. Export figures are looking reasonably healthy and if the Q3 growth figures are good it will go a long way to wipe out memories of Q1’s disastrous performance. Overall it looks like the markets are having a reality check, and that opens up some opportunities right now. Precious metals might be set to rebound from their current bargain prices, for example, and continued weakness in equities will only accelerate that process. As always there’s money to be made if you know where to look.