Questions resulting from a stock market fall

As European stock markets follow the turbulence in Asia and US trading, questions are asked about what is happening.

Many of the questions will focus on the possible ramifications for ordinary people, others want to know if it is likely the instability could bring about a crash.

How is this going to affect ordinary people?

Even if you don't own shares or bonds directly, there is a good chance you own them as part of your pension. Twelve million workers in the UK are now members of defined contribution (DC) schemes.

This means the value of their retirement income is directly dependent on the value of the shares their pension fund owns.

As long as you are not retiring in the very near future, this should not really affect you. In fact the shares your pension fund will now be buying will be cheaper and will have a better chance of growing in value.

How likely is it that this may lead to a crash?

Ultimately, share prices depend on two things: the profits made by companies, and the sentiment of investors. At the moment, many companies are making good profits, especially in the US, where tax cuts will boost earnings further.

As long as these economic fundamentals are good, it is unlikely there will be a full-blown "crash" - unless investors have a real reason to worry. Their concern at the moment is about rising inflation and rising interest rates, which are actually signs the global economy is growing well.

Is the falling stock market likely to cause an interest rate hike?

It's really the other way round. Investors are worried the US Federal Reserve - America's central bank - may raise rates four times this year, rather than the three previously expected. The Bank of England has also signalled that it expects to raise rates twice this year, maybe as soon as May. Higher borrowing costs mean lower profits for companies, and less spending by consumers, which is why share prices have fallen.

It is the danger of inflation which causes central banks to raise rates. The Bank of England's Monetary Policy Committee (MPC) will take market falls into account when deciding whether to increase rates, particularly if they think consumers are likely to cut their spending as a result.

Why is the Bank of England holding interest rates so low and ignoring inflation?

The Bank of England target for CPI inflation is 2%. The latest figures show CPI running at 3% in the year to December 2017.

While the Monetary Policy Committee's main job is to keep inflation in check, it also takes into account the health of - and risks to - the economy as a whole. While it did put up rates by 0.25% in November 2017 to 0.5% that was the first rise in 10 years.

However, the Bank has now hinted that it may not tolerate 3% inflation for much longer.

Should I invest in a stocks and shares ISA now?

Whilst no one knows what the stock market will do in the future, we are getting close to the end-of-year deadline for ISAs. If you are considering investing soon, it may be worth using up your ISA allowance for 2017/18. You are allowed to contribute up to £20,000.

If you are uncertain about the markets, you can leave it in cash, until you decide where you want to invest.



John BaxterComment