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Friday 12 October 2018

Ouch. This really hurts

imageIt cannot have escaped your notice that stocks - and tech stocks in particular - are having a torrid time this week. NASDAQ has fallen 9% in October (but is still up 5.6% YTD). Many of the highflying FAANGs have fallen even more steeply. You don't have to be an active stock market investor to feel the pain. Every pension pot will have some exposure to tech.

As far as I can see, the reasons for the sharp and sudden decline are not connected to the performance of the tech market in particular. As the Q3 reporting season starts there are no real signs that we are in for any negative surprises.

The problem is that interest rates are rising. Any interest rate rise increases the cost of debt for companies (reducing profitability) and consumers (reducing spending power). It also makes stock market investing less attractive compared to bonds and even cash deposits.

If stock market valuations dive, IPOs will suffer - indeed are being pulled. Ultimately that would work through into valuations in M&A and private fund-raising.

Of course, we have seen downturns before. Indeed since the current bull market started - about 10 years ago now - every dip has created a buying opportunity. But this dip seems different. As I have pointed out many times in my monthly share price roundups, we have been expecting this correction for quite a long time. We expected it in global markets - as there are many other worrying factors involved like trade wars, Italy, Russia, Trump, BREXIT etc. Tech is a major and integral part of the global economy. So, of course, it would suffer collateral damage in any downturn. But the severity of the current sell off, and how tech has been particularly badly affected, has come as a bit of a shock.

You would need to be 'brave' to predict that the current correction has ended or even to buy expecting markets to recover swiftly.

Posted by Richard Holway at '08:03' - Tagged: shares   stockmarket  

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