US market posts biggest percentage fall in six years

US markets have posted steep declines, with the Dow Jones and S&P 500 indices recording their biggest one-day percentage falls in over six years, since the height of the eurozone crisis in August 2011.  

The losses have spread to European markets, with the UK’s FTSE 100 index down 2.1 per cent in early trading; as of 10.15am it had slipped to below 7,200 points. The more domestically focused FTSE 250 index has declined 2.2 per cent, while the broader FTSE All Share index is showing a loss of 2.1 per cent.  

Overnight the Dow Jones index gave up 1,175 points, which translates into a 4.6 per cent fall. The S&P 500 posted a similar loss of 4.1 per cent, while the technology-heavy Nasdaq slipped 3.8 per cent. 

Since the start of the sell-off, which began at the end of last week, the Dow Jones and S&P 500 indices have lost 6.6 per cent and 5.7 per cent respectively. The sell-off has ended the longest winning streak for US markets in history, as it is more than 400 days since the last 5 per cent correction. 

According to Alex Scott, chief strategist at Seven Investment Management (7IM), the benign market conditions that were commonplace in 2017 now look to be over. 

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Pricier valuations are one factor behind the sell-off; another driver is the move by the US Federal Reserve to tighten monetary policy by raising interest rates in the face of rising wages and fears of an uplift in inflation.  

‘With other central banks winding down their quantitative easing policies, investors are worrying about the end of the cheap money era which has underpinned market confidence and valuations over the past few years,’ says Scott. 

‘Equity markets losing their previous dead-calm complacency is a surprise for many investors – but it is important to note that even with all of the terrifying headlines, the S&P 500 is only just negative on the year.’ 

Most commentators, however, stress that the sell-off is unlikely to herald the start of a full-blown downturn, which would lead to a bear market. The health of the global economy is fuelling investor optimism, while investor euphoria is noticeably lacking. 

Although investors are clearly buying into the rising market, there are signs of caution. According to the latest statistics from the Investment Association, multi-asset funds have been proving popular, with the mixed investment 20-60% shares and mixed investment 40-85% shares sectors the second and fourth most popular respectively in December. Bond funds were preferred to equity funds, with strategic bond funds the top-selling sector. 

Overnight in Asia stock markets dived, with Japan’s Nikkei 225 falling 4.7 per cent, while the Hong Kong Hang Seng index gave up 4.2 per cent. China’s Shanghai Composite index also slipped into the red, shedding 3.4 per cent.

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