If you follow the markets or financial news, it’s impossible to miss the doomsday headlines. 2016 has been the worst start to the year in a century. All the major indices (FTSE 100, Fortune 500, Nasdaq, etc.) have fallen nearly 10% since the 1st January. Some of the biggest companies have lost a combined total of over $100 billion. Ouch! So, what exactly is going on out there? Are we on the slippery slope to a recession? Or are there other factors at play? We’ve been following things carefully, and here’s what’s happening.
The price of oil
The big name in the 2016 stock exchange season is oil. Oil prices have crashed. And they’ve crashed fast! It even dipped below $30 per barrel last week. (Compared to a healthy $150 this time last year). There are lots of contributing factors here, but the main problem is supply and demand. The oil market is flooded, and Iran, Saudi Arabia and Russia refuse to stop producing. (That drives the price down). Meanwhile, demand is decreasing as China’s economy slows down. When supply increases and demand dries up, the price can only go one way. Down.
That leads us nicely to China. It seems every morning we wake up to bad news from China. Their major stock index, the Shanghai Composite, has fallen consistently since the beginning of the year. In fact, things were so bad at the start of the year, they had to close down the market for two days. Just to stop people from selling all their shares! The reason is simple. In the last two decades, China has focused on international growth, doing deals all over the planet. It became the second biggest economy on the planet doing so. Now, it’s looking internally to create a healthier domestic economy. (I.e. boost GDP, get its citizens buying lots to drive things at home). The switch in industry is a grinding process, and investors are running scared.
We won’t dwell on interest rates for too long because – well, it’s quite dense! In simple terms, the western economies put interest rates at near zero after the 2008 crash. It encouraged banks to lend money, and allowed the economy to breathe. (Because business could keep borrowing money, and mortgages were still cheap). In December, the US Federal Reserve decided the economy was finally strong again. So, it put up interest rates to 0.5%. Investors saw this as a good thing, (the economy is back on track!) Unfortunately, it had the reverse effect, and everything crashed. Clearly, businesses and individuals are not ready for higher interest rates yet.
The last, and perhaps most important factor, is panic. Casual investors, pension holders, and financiers are looking at this news, and they’re terrified. They’re putting two and two together, and getting five. Lots of investors see this as a new recession, so they’re jumping ship, and selling their shares. Which pushes the markets down even further. It’s a self-fulfilling prophecy.
How long will it continue? Well, time will tell. But, most analysts don’t believe this is a sign of recession. So hold on, and brave the stormy waters!