You can’t go a day without hearing some sort of macroeconomic information on the news. And sometimes you just sit there and think, how does this affect me? Well, macroeconomic news affects any investor or any person who holds investments of some sorts. In this article, I will aim to put into plain english some of the big news you have heard in recent month and how it will potentially affect your money.
In this article, I have aimed to concentrate on news coming out of both the U.S. and the U.K. as most British investors will have money invested in stock exchanges of these two nations.
1. The End of Quantitative Easing
What it is: After the height of the financial crisis in 2009, many central banks including the Bank of England and Federal Reserve introduced quantitative easing (QE)—an unconventional monetary policy in which the government buys short-term bonds from banks in order to help inject money into the economy. The goal of this influx is to beef up banks’ reserves, which then should decrease interest rates, promote lending and stimulate spending.
The federal reserve ended its Quantitative Easing program in October of this year. But this is not the full story, according to many economists both the Fed and BOE are still doing “Stealth Quantitative Easing” by purchasing more bonds with the interest the Fed earns on the bonds it has already purchased. This is the main reason why we have not yet seen a decline in the stock markets as many would have expected.
Why this matters to you: Quantitative easing has not only kept the stock market stable but has allowed it to balloon to new heights. Quantitative Easing has been a monetary heroin for the stock market so to speak. Banks and people have had access to cheap money (low interest rates) and this has inflated stock markets.
Stock Markets have not yet dropped as a result of the end of quantitative easing due to a number of factors. The first is stealth Q.E as mentioned above and the second is the massive Q.E currently being undertaken by the Bank of Japan and the European Central Banks.
But when QE does ‘officially’ come to an end, it is likely to bring pain to many investors. Stock markets could potentially be greatly volatile around this period and there could be lower bond prices due to rising interest rates. Those who are close to retirement may have to carefully decide if they should rebalance in order to maintain a diversified portfolio that they feel comfortable with and that works for their timeline.
2. Overextended Equity Rallies
What it is: An “equity rally” or more commonly known as a bull market is a prolonged period of rises in the stock market. The aforementioned quantitative easing has led to a massive buy-up of stocks, thus causing the stock markets to rise and this bull market has been going on for far too long according to many analysts.
And as we all know, what’s goes up usually comes down.
Since 2012, the stock market has gone straight up without any corrections. Deutsche Banks David Bianco states that “ S&P 500 corrections of 10% or more, including those that turned into bear markets, occur nearly every 1.5 years (357 trading days) on average since 1957. The last correction began over two years ago (550 trading days) in the summer of 2011”. Many analysts hold this same sentiment and believe that a correction will occur in 2015, but it will be less than a 10% correction.
Why this matters to you: Historical data suggests that when the stock market has gone up too fast without any corrections, it’s been followed by an even bigger, more sustained correction. Take the stock market crash of 2008 for instance, there was no correction in stock market prices between 2003 and 2007 and thus the markets tanked dramatically all at once.
If there is to be a correction, it may be a big one for your investments in the U.S. as both the Dow Jones and the S&P 500 indexes have broken all kinds of records this summer. The FTSE on the other hand may paint a different picture as although the stock market will drop, as a consequence of the drop in U.S. stock prices, the drop will be far less severe as the FTSE is still believed to be underpriced by many.
Having stated the above, you might be tempted to pull out of the market. It’s important not to let the market’s ups and downs drive you into a panic, since investors who pulled out of markets too quickly may not be able to take advantage of later potential gains. For example, investors who pulled out of stocks after the recession missed out on last year’s rally, when the market saw some of the largest gains since the mid-1990s.
3. The Rise of Emerging Markets
What it is: The term “emerging markets” refers to developing economies that are experiencing rapid growth. Recent data from the International Monetary Fund revealed that, for the first time, emerging markets—countries like Brazil, Russia (this might change), India, China, and Turkey—make up more than 50% of the world’s gross domestic product. So what this means is that they are collectively contributing more to the global economy than developed nations, like the U.K. and the U.S.
Many economists feel that the future of global growth will be in emerging markets, which may in turn provide both opportunity and competition for established businesses in the U.S. and the U.K.
Why this matters to you: There are pros and cons for both the U.K. and U.S. economies when it comes to the growing power of emerging markets. For example, the big loss in manufacturing jobs, especially during the first half of the decade, was due in part to companies outsourcing and sending their operations overseas.On the flip side, there is a rapidly growing emerging middle class in these countries that’s hungry for all types of products. This gives multinational companies—and their shareholders—lots of opportunity to engage in untapped markets..
And if you’re thinking of investing in emerging markets as a way to diversify your portfolio, it’s wise to note that these regions offer the potential for fast growth, but returns could be way more volatile as there are risks due to their less-stable political environments and economies.
4. The decrease in oil prices
Oil is the lifeblood of all modern economies and its dramatic decline in price has come as a shock to many this year. Oil prices reached a peak of about $115 a barrel in the middle of this year and it has now settled at around $60 a barrel.
Why it matters to you: Although a declining oil price is a good sign for any economy that imports oil, it has led to stock market declines in all the big indices around the world as companies in the oil sector compromise a large chunk of stock market share. If you hold units in the FTSE, Dow Jones or the S&P500, you saw that the oil price had a negative impact on your returns. But lower oil prices dragging down the stock market was always going to happen in the short term. As time goes by, you will see the positive effects of this and stock markets will rise as this energy saving will be passed on to companies and individuals a like and thus they will be able to spend more causing the stock market to rise in the long run.
5. The recent rally in Gold Prices
What it is: Gold, silver and other precious metals are often viewed as a safe investment haven when the stock market gets volatile, so investing in these commodities could be a way to diversify and help spread some risk in your portfolio.
Precious-metal prices often fluctuate based on market volatility, inflation fears and political instability. In the second quarter of 2014, for example, gold and silver prices continued to dip as the economy strengthened, but more recently, gold experienced a rally partly due to the troubles in the Ukraine, Ebola Fears and the sudden decline in oil prices.
Why it should matter to you: You probably don’t think about the price of gold or silver unless you’re going to buy jewelry. But prices of these precious metals can be a sign of bigger trends. When Gold and Silver prices decline because demand goes down, this could be an indication that people are investing more of their money in equities, a.k.a. the stock market. Likewise, if prices of these metals increase, it may be a sign that investors are concerned about market volatility and a weakening dollar and thus move away from the stock market and into gold.
If you invest in gold, such as through an exchange-traded fund, it’s also good to know that interest rates and gold prices generally have an inverse (opposite) relationship, although there are lots of factors that affect the price of precious metals. With the end of quantitative easing, it’s possible interest rates could rise, which means gold prices may go down. On the other hand, I believe that Silver Prices will continue to rise and you can see my article regarding this here .