Is the FTSE set to enter a bear market?

For the second time in seven months, the Shanghai Composite index entered bear market territory, triggering a mass sell-off across European stock markets. But is the FTSE set to follow suit?

It’s been a rough couple of days in the global financial markets; last week saw the worst start to the year in financial history, with the S&P 500 tumbling 6 percent. A knock-on effect on the FTSE caused significant volatility, combined with disappointing Christmas trading results for a couple of blue chip companies. After a period of steady growth since the 2008 financial crisis, the last six months have seen significant instability, and there is a general air of negativity in the markets.

However big sell-offs, corrections, and even crashes are all normal parts of a long term bull market. In an interview with the Telegraph ,JP Morgan analyst Alex reiterated that, if history is any guide, a bear market will not be hitting the stock market in America – or the UK – any time soon.

“None of the four key factors that have triggered previous bear markets is a cause for concern,” he said. “A recession looks unlikely as America’s economy is ticking along nicely. Similarly, an oil price spike does not look on the cards .

“Rates are going to rise gradually from here, so we won’t see the kind of aggressive or unexpected tightening that has been associated with previous crashes, while in my opinion US shares are at fair value rather than expensive.”

But the fact remains that the FTSE has fallen over 20 percent from its high in April last year, and a growing number of respected investors are pulling out of the stock market. Over the past eight months, the Greek debt crisis has had a significant effect on European markets, highlighting the dangers of a single currency and resulting in more cautious investor sentiment.

Similarly, China caused shockwaves throughout global markets last week with another surprise devaluation of the Chinese Yuan, causing such a large sell-off of Chinese shares that trading was suspended – twice. With further devaluation likely, it is probable that market sentiment will continue to be hit in the months ahead, having a knock-on effect on the FTSE.

Whilst the price of oil usually tends to rocket when economies go downhill, tumbling prices are also having a negative effect. Oil and commodities giants are slashing assets and jobs in an attempt to stay afloat – sending their share prices tumbling, many of which prop up national and international stock markets.

Generally, a bear market is described as period of snowballing negative investor sentiment, causing a rapid sell-off of shares, usually leading to a 20 percent decrease in several major market indexes over two months. Whilst the last few months have undoubtedly been rocky, key markets, including the DOW and the FTSE have only fallen by around 10 percent – not enough to statistically enter a bear market. It seems that for now, at least, the markets are keeping their heads above water. But as the waters become choppier, investor sentiment is becoming increasingly negative – Mark Carney has even shown a lack of confidence in the long-term health of the UK’s economy, neglecting to follow Janet Yellen’s lead and raise interest rates from their record low of 0.5 percent. Undoubtedly, the markets are entering a period of tricky territory unseen for a couple of years – how it will fare remains to be seen.

Miranda Wadham on 15/01/2016
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