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Why is the stock market falling?

Your basic guide to what has been moving share prices in recent times.

 

by Chris Marshall on Apr 25, 2012 at 08:31

Why is the stock market falling?

One way or another, everyone has a stake in the stock market.

You might not invest directly in shares (also known as equities or stocks), but if you have a pension then that will hold shares. Or you might have an interest in a company, which may be dependent on the stock market to raise money to expand, for example.

So when stock markets have a rough time it isn’t only important for City types.

To understand why markets (here we’re concentrating on share markets, but 'markets' is an umbrella term for many assets including currencies, bonds and commodities such as oil) are falling, we first need to step back a little.

A brief history of boom and bust

Stock markets in the Western world tend to broadly move in line with one another. Taking a look at the past decade or so, you can see that stock indices such as London’s FTSE 100 (the 100 biggest listed ‘blue chips’ such as Tesco, BP or Barclays) or the S&P 500, an index of shares listed in the US, peaked in 2000.

Then, with the bursting of the ‘dot com bubble’ – the bust that followed speculative buying of internet and information technology company shares – markets shot down until late 2002 and early 2003, after which they started climbing again. They did so right up until peaking in the second half of 2007.

Crash!

Then it all went drastically wrong. The credit crunch exploded with a chain of banks failing or needing to be rescued with taxpayers' money. On a few particularly bad days the FTSE 100 fell as much as 7%, or, in the worst case, on 10 October 2008, a staggering 8.85% or 381 points. You have to watch the markets for a while to get a feel for how big a drop that is. A decline of about 2% is normally enough to yield some fairly scary news headlines.

It's clear why stock markets fell so much on days like 10 October 2008: the global financial crisis had reached a point where global recession seemed imminent. Uncertainty (stock markets’ greatest foe – it’ll come up a lot in this article) about government support for the banks and what was next sparked panic-selling of shares.

Plus, crucially, banks – which lubricate the global economy – were reluctant to lend money to one another, uncertain what toxic assets their competitors might be harbouring.

This wasn’t helped by comments from high-profile figures using language like ‘great crash of 2008’ and ‘bloodbath’. But in market terms, they were spot on.

Five months later and markets had hit rock-bottom. In the FTSE 100’s case this meant 3,753 points – that’s 3,000 points lower than it had been at its 2007 peak.

But what goes down….

So began the long climb up again, all the way – barring some fairly big dips – until last summer.

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5 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Apr 25, 2012 at 11:55

The Trend is upwards...... a little naive..... Euroland, UK & USA are struggling under enormous debt and hoping to inflate their way out of the mess they have made of their economies.... more likely we will see hype inflation than defaults.... so the trend in equities is upwards..... naive....

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joe stalin

Apr 25, 2012 at 17:29

Markets are falling because confidence in the way they are being regulated is still fragile. Investors fear another flash crash and manipulation by HFT's. Fundementals are ok with many companies doing fine as is being reflected by rising dividend returns to share holders.Sure we have just headed back into recession but then look at what caused to number to dip and we may well see a revision in this very volatile figure. Given what Osboren and co are doing to the economy I don't many economic gurus were looking at a return to stellar growth. For that to occur we need a Chancellor who is up to the job with some balls no not red ED to dramatically cut the rate of CT and income tax. There is a lot of vested interest to keep institutional money on the sidelines so that markets remain thin and thus easily manipulated. I dont see this change any time soon but for the brave their are plenty of decent stocks out there with cracking yields. Take the income -for now as the capital gains wil surely come once the hedgies have had their fill.

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mikeran

Apr 25, 2012 at 18:21

Joe Stalin, you are talking about a face of the market, that the market itself will not own up to , or confront. Neither it seems will the regulatory authorities. Do they actually see or want to see what is going on. Add to that an accident prone govt.

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joe stalin

Apr 26, 2012 at 07:31

Mikeran Precisely so. that is why I believe stock picking is the answer with dividends as first indication. I feel that much of the volatility is down to prolific growth in the use of index ETF's which by definition are crude blunt instruments playing on the fact the FTSE has long ceased to be a valid index by which we can judge the state of our economy. It is because of this that I believe dividends are a good indicator as to what is really going on Take Man Group it is on a yield of 14% and in my opinion is not going bust. Even the house bulders are beginning to pay out as do the insurers. I feel even our much maligned banks have or are close to turning the corner despite the Govt's best efforts to prevent them from doing so. as always though research is key imo

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john errington

Apr 30, 2012 at 14:55

I believe the reason the stock market has become so much more volatile in recent years (ie since the 80's) is because the internet has enabled shares to be traded much more rapidly than was possible before that time. This has led to "chaotic" behaviour in which underlying trends become less apparent and rapid fluctuation is the norm.

http://www.makemaths.com/chaos-theory.html

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