The end of last week saw the Dow Jones fall by 4.6% in a single day – the highest amount in six years. It signalled the beginning of a shake-up around the world, as equity markets from Europe to Asia began to see big drops overnight.
The UK fared slightly better, reporting a slide of 0.4% on Friday, but it’s sparked many to worry that what has been a period of relative stability might be coming to an abrupt end.
Markets have enjoyed stable growth over the past year on the back of a surprisingly buoyant global economy. The Dow and S&P 500 both hit record highs in January. But Thursday’s sell-off saw both drop by 10% in just a few weeks.
So what triggered it?
The initial shock came following a better-than-expected US jobs report, which led to speculation about a rise in interest rates and higher inflation. Bond yields and lending rates often tend to follow suit, subsequently reducing the appeal of equities. Investors, many of whom were betting on a continued period of calm, were largely caught off-guard.
This has been echoed in the UK, where the Bank of England’s Mark Carney recently suggested that interest rates could be increased earlier and faster than initially thought.
Nothing can be taken for granted
A host of political shocks in 2017 led many to shy away from what looked to be a turbulent time for the markets. In reality, it turned out to be a rather robust period of steady growth.
Then, as the relative stability of the stock market was starting to tempt shy investors back in, it suffered the biggest shake-up in six years.
Some commentators have stressed that this shouldn’t be a huge cause for concern – citing that it is simply a welcome return to normality following a decade of recovery. Instead, it should act as a reminder of the importance of not putting all your eggs in one basket. The stock market can be great in the long-run, for sure. But in short-term it can be a pretty bumpy ride. Research shows that investing in the FTSE 100 for three years or fewer carries a nearly 20% chance of loss.1
So, even when times appear rosy, a diversified investment portfolio – such as one that includes peer to peer lending, for example – should always be top priority for every investor. After all, it can be easy to get complacent when sailing on a steady ship.
1 Lipper, Percentage annual change: FTSE 100 Total Return Index (1984 to present).