Recently we have seen many of the world stock indices fall by amounts only seen by when the recession loomed over us during the year 2008. Remember that year? Gordon Brown had taken over as Prime Minister, Oil was trading at $147 and inflation was flirting with 5%. A very radical year that has changed the economic outlook since then.
So how important is the stock market to the general person?
Not much at all. If you don’t own any shares or work for a company that is not listed on any stock market then it doesn’t mean much to you at all.
However, to those with some greater insight it marks the level of economic activity. The best way to think of the stock market is like a thermometer. When the temperature increases and it starts to sweat and we need to shower three times a day. Then, things are going really well especially when we look at the FT.com or BBC News and we see the green arrows and big figures like 6000 for the FTSE. However, when it becomes sub-zero weather and we resort to our long johns as a means of staying warm then there is trouble coming up. The stock market shows red arrows and a decline in the figures.
So what exactly does it mean?
The stock market indicates the level of economic activity. Economist, traders, politicians and anyone else who is interested to see how industries are performing first look at the stock market as it tells them how the outlook is. Any news that is published be it the inflation figures, government borrowing or unemployment figures for that matter will all be driven into the stock market. If they are good then we see a rise in the stock market, if bad then I guess it’s time to resort to the long johns.
What has been taking place with all these banks on the news?
Well, initially they were fined as they were mis-selling insurance to customers and that bought down their profit figures which did not please the shareholders at all. Previous to that they had been given the bank tax to raise revenue for the on-going deficit in the British Economy and this resulted in smaller profits. Lastly, they still have the debt laden mortgage book from the financial crisis. RBS and LLOYDS have written off more bad debts this year from an incident three years ago. This just shows how damaged the banks are and that they are still fragile from the recession. When all this bad news is published the market fears what is due to come next and begins to fall. These leads to articles being published which say “Markets finished on the low because of X Y Z” . e.ghttp://www.bbc.co.uk/news/business-14587093
Has the Greek problem escalated since?
Its hard to say it because the Eurozone economies are covering it up. We know that from within Greece is still pretty much a problem and no matter how articulate the plans by Ms. Merkel may be Germany must prepare to child Greece back into the Euro when it has crashed and raised its hands into the air. So yes, Greece is one of the reasons why the market sentiment is low. It must be noted that with our weak economic growth many fear that we may have another recession if we continue at such a falling rate. What may be bad news for me and you is good news for someone else. In this case people who are associated with the sub-prime or the inferior goods market. As they are hoping to see an increase in revenue.
Why does America affect the world?
America is what is known as the “Father of Capitalism”. If it fails to deliver results then everyone out there becomes scared. Hence, if the NYSE closes on a down it is 99% certain the FTSE will close on a down and other Eurozone markets will follow suit. That is a rule of thumb by the way and don’t base your trading on that! In addition, as many firms are affiliated with the USA; be it through trade or headquarters. They are still very dependent on the American economy growing even though it is hard to call it a superpower these days.
In summary, the stock market tells us how well the economy is performing and you are able to see how well the industries are doing by the relative industry index. You may also want to see how well the firm is performing for instance BP.LSE. When the Gulf of Mexico disaster took place BP’s share price slumped sub 300p! That’s absolutely shocking for a company only month prior was trading at 600p. So that just illustrates how important news is and the impact it has on the market.