That Stock Market 'bloodbath' and you

Does a ‘bloodbath’ on plummeting Stock Markets matter out on the streets in Nottingham? Well, not if you don’t know about it, you might well argue.
And there’ll be a lot of people tempted to look the other way at the moment, either because they’ve had enough of financial bad news or they believe in steering clear of what they don’t understand (if only bankers had done the same…).
Anyway, you can hardly avoid the plummeting Stock Markets when the 24-hour news channels seem to orgy in it.
But why is it such a big deal? I’m not sure wall-to-wall coverage of the minute-by-minute, hour-by-hour Stock Market rollercoaster serves any real purpose. Simply saying share prices have ‘soared’ or ‘plummeted’ is meaningless unless you explain why.
Yesterday’s big fall on Wall Street, for example, was caused by three specific worries – mutual funds calling in loans, and the financial health of two major car companies coming into question because car buyers can’t get credit – and a general belief that we’re heading for global recession.
Investors always sell-off shares in a situation like that, and when the herd mentality kicks in, you get the sharp drops seen yesterday.
The same will happen today on the London Stock Exchange and on Wall Street tonight, partly for those same reasons and partly also because the massive insurance pay-outs on debts held by the failed bank Lehman are due. That’s going to take money out of institutions already short of it, so there’ll be more sell-offs
But beyond the bank lending/credit crisis, Stock Markets would have been falling anyway. Investors generally sell shares or stop buying them when they believe an economic downturn means the value of businesses should fall.
If there’s little demand for shares, prices continue to fall until investors thinks they’re cheap enough to snap-up. We haven’t reached that bottom point yet.
If you stand back from all this over-heated financial toil and trouble two things matter.
One is that the scale of the Stock Market falls are a sign of a continuing belief that while one or two Governments have taken decisive action to sort the banks out, others are still dithering.
Secondly, big Stock Market falls DO matter to you and me. That’s because they affect the value of your pension pot, which will at least partly have been invested in company stocks and shares. As those shares fall, so does the amount of money in your pot.
It follows that Governments around the world need to be seen taking decisive, coordinated action to prop up the financial system. At that point, Stock Markets will probably stabilise. Over time (and I’m talking years here) they will rise again.
Any financial good news? The fragile state of the global economy now means prices of pretty much everything will have to come down because demand will fall. So you’ll find it cheaper to fill your car up and less costly to buy staple goods because demand is also falling for the raw materials that go into making them. The cost of borrowing is also likely to fall, with another interest rate cut likely next month.
But don’t get tempted to wander into the Vic Centre and splurge on bargains. That’s how we got here in the first place…