Current Market Conditions.
You will be aware from the media that there have been sharp declines in global markets in response to investor concerns that the US economy is slowing.
This concern is based on weak jobs data released on Friday, coupled with the Federal Reserve holding back on interest rate cuts last week and weaker than anticipated financial results from some American companies.
The valuation levels of some of the US technology stocks have been questioned for several months, and some recent falls have been focused on these companies. A correction of this type, whilst not desirable, is not surprising, given the disparity of valuations between these stocks and the rest of the US stock market.
In some ways, this may have been seen as a bubble ready to burst, but we should remember that the majority of these stocks are large, profitable businesses and are not the speculative stocks of the 2000 dot-com bubble.
In addition, (unlike the Bank of England that cut interest rates last week}, the Bank of Japan raised interest rates last week, strengthening the yen and making Japanese equities more expensive for foreign investors.
Markets continue to be sensitive to swings in sentiment, and interest rates significantly influence investor behaviour. Trading is lighter at the moment because of the summer holidays, which is exaggerating some of the movements in stock prices.
A longer-term investment strategy cannot anticipate these swings, so it remains sensible to ignore the current market noise. Until the concerns surrounding slowing the US economy abate, wider market volatility can be expected in the short term.
Commentary courtesy of Rayner Spencer Mills Research
