● It was another wild week for markets. If anything, it was even more turbulent than last week. The spectre of an impending global recession, the impact of the US downgrade, the continued panic in the eurozone – all of that was sinking in this week.
As a result, the market was all over the place, diving and soaring between extremes of fear and extremes of greed. The FTSE 100 started the week at 5,246 and closed above 5,300. That doesn’t sound like much of a move, and certainly nothing to panic about. But it hides some big spikes and troughs across the week – the FTSE dipped below 4,800 at one point.
● What was the reason for all this volatility? We could point to half-a-dozen reasons – and will – but the fact is the market is just incredibly jumpy. The Federal Reserve decision on Tuesday to keep interest rates at 0% for another two years was a double-edged sword for a start.
On the one hand, the promise of cheap money forever cheered markets. On the other, the fact that the Fed is worried enough to promise another two years of low rates shows it doesn’t believe a recovery is anywhere on the horizon. That’s a pretty miserable revelation for anyone who thought the rally of the past two years had any basis in reality.
Meanwhile, French banks were in focus. With the US downgraded from AAA by Standard & Poor’s, investors are looking around at the world’s remaining AAA sovereigns and thinking: “are they really in a better state than the US? I don’t think so”. France happened to be the one that everyone lighted on this week. You can read more about why in Thursday’s Money Morning: The eurozone crisis won’t go away – that’s bad news for stocks.
An absolutely awful consumer confidence figure in the US also knocked some of the steam out of the markets come Friday afternoon. US consumers are apparently more miserable than at any time since May 1980.
● So unsurprisingly, safe havens were in great demand this week. The Swiss franc shot up, until the Swiss National Bank was forced to go so far as to threaten pegging it to the euro.
And gold of course, surged. It hit a new record above $1,800 an ounce, before sliding rapidly towards the end of the week. Should you be worried? John C Burford, our resident gold bear and spread betting guru (MoneyWeek as a whole is very bullish on gold as you know, so it’s good for John to keep us on our toes) reckons this might be a top. You can read his piece here: Has gold finally topped?
My feeling though is that having gone up so far and so fast, a correction just now is a good sign. With the Fed promising to keep rates lower for longer, it’s hard to see where the tightening of monetary policy necessary to end the gold bull market will come from.
● The obvious reaction when you see a market plunge like this is to wonder: is this a buying opportunity? US ‘insiders’, such as company directors, seem to think it is. As my colleague David Stevenson pointed out yesterday, insider deals have shot up.
However, as he also points out, insiders don’t always get it right. So you need to hedge your bets by buying stocks that are good value. David highlights ten such stocks in the current issue of MoneyWeek, out now. If you’re not already a subscriber, claim your first three issues free here.
● Amid all this turmoil, the Bank of England also quietly said that it doesn’t really expect to raise interest rates for a while either. But governor Mervyn King knows better than to rule it out completely. Instead he gave us all his typically glum outlook on the economy.
However, despite the gloom, Bengt Saelensminde thinks we’ll see no more quantitative easing in the UK any time soon, for three reasons.
Number one is that we can’t afford to weaken the pound anymore – we import too much, so a weaker pound will just make the currency weaker, and drive up living costs even more. That’s not a recipe for recovery.
Number two, is that sterling isn’t the world’s reserve currency any more (for more on the dollar as reserve currency and what might replace it, see this week’s issue of MoneyWeek magazine). Basically, the US can trash the dollar as much as it wants – there will always be some demand for it as it’s the currency that governs international trade. “Even as news of the US credit downgrade is being absorbed by the markets, investors still want the dollar. US bonds are still trading around historical highs.” Once it’s no longer the reserve currency of course, it will lose that privilege. But you could be a very long time waiting for it.
Finally, the Bank of England has a different job description to the Fed. The BoE’s focus is much more explicitly on inflation than the Fed’s is. So it’s harder to make the case for QE, especially with inflation at current levels.
You can’t rule it out, of course, says Bengt. But for now, QE is more likely to come from the US, he reckons.
● So how on earth can you sleep soundly through panic like this? Easy, says Stephen Bland. Ignore it. In his Dividend Letter newsletter, Stephen spells out his very simple philosophy: you build a diversified portfolio of high-yielding, blue-chip stocks and you sit on it through thick and thin. Simple as that. You can find out more here, but all I’d say is that with people I’d call the smart money – such as GMO’s Jeremy Grantham – basically bearish on all types of stocks except high-quality blue chips, Stephen’s strategy looks well worth investigating in a market that’s likely to go sideways at best for some time to come.
● If you didn’t get a chance to check out MoneyWeek deputy editor Tim Bennett’s complete beginner’s guide to picking stocks
, then now’s the time to do it – in this environment, arming yourself with knowledge is one of the best investments you can make.
● One last thing. Our colleague Ruth Jackson – many of you will know Ruth from her MoneyWeek Saver email and her work in MoneyWeek magazine – is leaving. We wish her the best of luck. It also means that we’re looking for a new writer.
If you a) have a keen interest in finance, b) a love of writing, and c) feel able to combine them to create insightful, intelligent, jargon-free, entertaining copy about financial markets, investing and all other things money related, then please get in touch with me at john.stepek@moneyweek.com.
Direct experience of journalism is not required, but you do need a demonstrable interest in and understanding of investment, and a burning desire to write professionally. If that sounds like you, send me three ideas for articles that you think would work well on the MoneyWeek website or in the magazine.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.
Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• Ruth Jackson
• James McKeigue
• David Stevenson