The Economist explains: Why stockmarkets are falling

Posted: January 22, 2016 in economy
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SHARE prices have been falling persistently since the start of 2016 with markets in Europe and Japan now down more than 20% from their recent highs, the technical definition of a bear market. Bear phases are reasonably common; the S&P 500 index has suffered at least 15 of them since 1929, although it has yet to meet the definition this time round.It is never possible to be definitive about the reasons for a stockmarket fall. Investors don’t have to fill in a form explaining their reasons for selling shares. The popular explanations for the current decline involve worries about the health of the Chinese (and thus the global) economy; concerns that corporate profits may be falling; and fears that the Federal Reserve may have tightened monetary policy too soon when it raised interest rates in December. And a survey of fund managers by Bank of America Merrill Lynch indicates these explanations are roughly right; optimism about the global economy has declined, more than half think profits will fall over the next 12 months and a Chinese recession is perceived to be the biggest risk.Another way of understanding the decline is to focus on the theoretical basis for share valuations; a share represents the future cashflows the investor will receive, discounted at the appropriate rate (the higher the discount rate, the lower the current price). So falling share prices either …

via Economic Crisis


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