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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 08:31Follow @cmarshallCW
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.
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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