Why are investment markets in turmoil?

So what has happened? Initially economic data from the year’s second quarter was not as good as expected. Indeed the Bank of England, already having reduced our growth expectations to 1.7% this year, has reduced it further to 1.4%. the market doesn’t like surprises like that. It also caused some economic commentators to talk about a second recession.  I believe the majority opinion, however, is that this is unlikely to happen.

Secondly, markets were disappointed at the irresponsibility shown by politicians in the US, and dithering by politicians in Europe. I think one can excuse indecisiveness to a certain extent, but the self interest and inflexible ideology of some of the politicians in the Senate showed democracy in a poor light. Certainly we heard some quite gloating comments from China, much criticised for their lack of democracy.

The US government finally did the right thing and came to an agreement on the debt ceiling crisis. Had the US been unable to increase the amount of debt that it can sustain, beyond the ceiling that had been set by Congress, it would have been unable then to pay a return on some of the government bonds and would have defaulted on its debt. A bit like one of us missing a credit card payment. This could not be allowed to happen, but eventually an agreement was reached. However, this was not before Standard and Poors, one of the major credit rating agencies, downgraded the US from a AAA crediting rating to a AA+ rating, mainly on the back of political squabbling. Since then the other major credit agencies have maintained America’s AAA rating. Perhaps it was all a storm in a tea-cup. Also the difference between an AAA rating and an AA+ is minimal in practical terms. However politicians should be aware of their responsibilities and of the affect that such matters can have worldwide.

The above caused considerable concerns in world markets. After all, if the US can be downgraded then what will happen next. However once again, a major economic crisis has been averted. There is no doubt that moving forward there will be a bumpy road ahead, but it is difficult to see any real value in investing much beyond stocks and shares and some types of fixed interest at the moment. It looks as if interest rates will remain extremely low for some time to come, with  some pundits even suggesting 4-5 years. Government gilts seem poor value at present and the value of gold is scarily high. We live, as they say, in interesting times. We do believe that a properly invested diversified portfolio is the right way of investing. It has been in the past, and continues to be so.

Indeed the effect, for those that are considering investing, is that markets are now better value than before.