Red lines have filled television screens and newspaper pages as markets plunge around the world but what does this mean for us?
At the end of a very jittery week, the FTSE index of 100 leading shares closed down 1 per cent on the day, finishing above the so-called “psychologically important” 5000 mark. But the current volatility of stock markets is an indication of a wider issue – uncertainty.
Internationally, low interest rates (yields) on some government bonds, normally a long-term investment, are suggestive of expectations of a prolonged slowdown. The price of gold is at a record high as nervous investors look towards investments which have traditionally proved more stable, and earlier in August the Swiss government moved to stop a flight by investors into the Swiss franc, another traditional financial safe-haven.
One thing I would recommend, is that you find out what your pension is invested in Sarah Pennells
But financial journalist Sarah Pennells, founder of the personal finance website Savvy Woman, thinks people should not panic: “It’s pretty unnerving, to say the least, when share prices plummet as they have done in recent days. But unless you need the money you’ve invested, it doesn’t make sense to cash in your investments now.”
The background to this domestically is the state of the wider UK economy. Jonathan Portes, director of the National Institute for Economic and Social Research (NIESR) says the movement in part reflects the fact that investors are having to manage their economic expectations: “Stock markets go up and down a lot and people shouldn’t panic because of day to day movements.
“However, the recent market tailspin does reflect the fact that some people in the markets were too optimistic about the economy and are now adjusting their expectations. Although we’re not in technically a recession we’re going through a flat patch with growth below trend.”
And NIESR believes this picture is not going to improve much for several years: “Output is 4 per cent lower than at the start of the recession in 2008. We’re not technically in a recession any more but, in a sustained recovery, we would normally expect annual growth of at least 2 per cent.
“We’ve predicted that the UK economy will only get back to pre-recession levels of output in 2013.”
And the market uncertainty impacts outside the stock exchanges, among other things, in the form of low levels of lending to homebuyers and businesses. Less lending to businesses for investment purposes stunts their growth, businesses are reluctant to increase their workforces, jobs are less secure, new jobs are scarce and these things in combination mean the economy fails to grow.
Jonathan Portes from NIESR says that at least some of the private sector job growth we have seen so far did not emerge after last year’s election: “As far as the labour market goes, in the middle of last year it looked like things were getting better again but things flattened out and then, as we’ve seen in this week’s figures, worsened.
“Last week, George Osborne mentioned several times the half a million private sector jobs created ‘last year’ but the majority of those were actually created between March and June of 2010 – before the present Government’s austerity measures came in.”
Another way some of us are exposed to the markets is through our pensions and Sarah Pennells says it pays to find out just how much exposure your fund has to stock market volatility: “One thing I would recommend, whether you’ve started saving recently or are in your 50s, is that you find out what your pension is invested in.
“Many people who save through workplace pension schemes that aren’t linked to their salary put their money in the ‘default’ pension fund (it’s the one your money is paid into if you don’t actively choose another fund) and the make-up of these funds varies widely.
“Some spread your money through a range of investments while others focus heavily on shares. I’m not suggesting that you switch funds now, but it’s something to be aware of because I’m sure this won’t be the last time we see some serious volatility in the markets.
“Take advice from an independent financial adviser unless you’re happy to go it alone with your investments.”