Tuesday, January 22, 2008

Forecast for Stock Markets in 2008

Firstly, I should say I have no money to invest, so I cannot put my money where my mouth is (a trait of Economists I fear)

Nevertheless, the big falls in the stock market have made me wonder whether now would be a good time to invest.

Why is the Stock Market Falling.

The FTSE 100 fell 323 points yesterday closing at 5,578. It has now fallen 14% since the start of the year. The fall of nearly 900-points has wiped out the gains of the last 18 month.

  1. Fears of US recession. Despite impressive growth in the last quarter of 2007, many talk as if recession in the US is an inevitability. The main factor is the problems in the housing market. House prices have already fallen by 5%, and are predicted to keep falling. Falling house prices will have a significant impact on reducing consumer spending (traditional the mainstay of the US economy)

  2. Global Credit Crunch. Related to the crisis in the US housing market, is the problems stemming from the sub prime markets. Basically, many banking firms have had to write off huge losses, this has led to caution in further bank lending and will slow down the economy. Last week there was bad news for the bond market used for buying mortgage loans. Falling house prices and rising repossessions have reduced their value causing losses for banking firms.

  3. Fears of a Global Recession. The assumption is that a US recession will lead to a global recession. US imports plays a significant role in boosting global growth. If US enters into a recession it might bring other economies down as well.

Why It Might be a Good Time To Buy

  1. Share prices have already fallen in anticipation of the recession. Even if a recession occurs, there is chance that share prices can rise. (Share prices often rise in recession years, because the stock market have already built the recession into prices before it occurs.

  2. A global recession is unlikley. The US is no longer the dominant force in the world economy. Economic growth in countries like China and India will take up some of the slack. I feel it is possible for the US to experience recession without dragging the UK and EU into recession as well.

Having said that, I do feel there are real problems with the US economy, the housing market may continue to fall for longer than people might hope. I also doubt that lower interest rates and expansionary fiscal policy will be able to do much to stimulate growth. The real question is how much the US economic malaise spreads to the rest of the world.

No comments: