Why are stock markets falling?

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It is It’s been another brutal week for equity markets with lackluster UK growth and US prices still rising rapidly, adding to the reasons why investors are pessimistic.

The S&P 500 Index, representing the giant US stock market, is now down 7.6% over the past five days, while in the UK the FTSE 100 is down 4.1%. The falls come on top of a difficult year so far for equity investors in global markets, as measured by the MSCI World Index, now down 18% year-to-date. A 20% drop would mean we have entered a bear market.

What’s behind the recent stock market crashes?

Many of the reasons for the stock market crash are well documented: inflation, rising interest rates, an energy crisis aggravated by Russia’s war in Ukraine. But it’s the way each of these factors intersect and seem to compound each other that really hurts investor sentiment.

At the start of the year, investors analyzed the implications of an interest rate hike, necessary to combat rising inflation, but which would hurt the returns of highly valued bonds and major companies in the stock market. . Then came the war in Ukraine which caused already high energy prices to spike.

This then translated into an overall rise in inflation, which forced an acceleration in the rise in interest rates. And now, rising interest rates and inflation are combining to hurt overall economic growth, raising fears of a recession.

What Mr Market thinks

The market has treated all of this negative news with a high degree of uncertainty as to how it all plays out from here – and it looks like prices are in the worst case.

In fact, according to DataTrek research reported by Yahoo Finance this week, the S&P 500 is on course for its worst year-to-date performance since 1962.

Things look bad – but are they really that bad?

The latest news regarding the slowdown in economic output in the UK did little to improve sentiment, but there are also glimmers of optimism.

Annual inflation in the United States was 8.3% in April. This is still high, but actually cooler than the 8.5% posted in March.

What investors should do when stocks fall

For investors, this has been a head turner. In addition to the widespread losses, there has been a significant reversal in leadership in the stock markets. There is no clearer indicator of this than the race to become the largest publicly traded company in the world.

For several years it has been the American tech giants that have come out on top, with Apple edging out Microsoft, Alphabet (home of Google) and Amazon to top a market value of $3 trillion at the turn of the year.

But technology and other growth-oriented companies have suffered as inflation and interest rates devalue their supposed future earnings. By contrast, businesses that stand to benefit from higher prices have prospered.

So much so, in fact, that Apple has now been overtaken as the world’s most valuable listed company by Saudi Aramco, the Saudi oil company.

Investors are reassessing the lofty valuations of technology companies, fearing that rising prices and the crisis in the cost of living will cause consumers to tighten their belts. This sea change has already been seen in the underperformance of fund investor favorites like Scottish Mortgage Investment Trust and Rathbone Global Opportunities Fund.

Meanwhile, the oil sector remains one of the few bright spots for investors so far in 2022. Fidelity Select 50 favorites Franklin UK Equity Income Fund and Liontrust UK Growth Fund both currently hold overweight positions in BP .

For more thoughts on where the price of oil is heading from here, watch our latest video on the Commodities sector investment outlook.

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