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Will stock markets crash in 2019?

By Mike Narouei, Content Producer at Boring Money

17 Jan, 2019

In many ways, this is an odd question. After all, markets have already crashed. The main barometer of UK shares – the FTSE 100 – is down 10% on its level a year ago. More adventurous investors have been hit even harder: the leading index of Asian shares, for example, the Hang Seng, is down 15%. The question, therefore, is less whether they will crash than whether they will go on crashing.

This may seem like a moot point, but it speaks to a certain inclination among investors to start worrying about a market crash sometime after it has happened. The time to start worrying about a market crash and making the appropriate adjustments was six months ago. Right now, it’s too late to start selling out and putting everything in cash.

That said, there are a number of factors that will determine whether markets go up or down from here:

China's effect on global markets

Yes, Beijing is a long way from London, but what’s happening in China could still influence UK markets. That’s because China is an important source of growth in the global economy, in much the same way as the US. If the global economy slows, companies can’t make profits and share prices fall. That’s the theory at least.

Investors have been particularly worried about the outlook for China because of the US/China trade war. The fact that Donald Trump is slapping tariffs on Chinese goods means that they are more expensive and fewer people want to buy them. That’s bad news for the Chinese economy. Although there has been some thawing in relations between China and the US, there’s a long way to go.

Tom Becket, chief investment officer of wealth manager Psigma, says: “There is a danger that any resolution is not worth the paper it’s written on. This is a multi-decade problem. Politics pose as great a risk today as at any time since the cold war.” He argues the real battle is not over trade, but China’s increasing economic and political might.

Expect any escalation in the trade war, or any weakening of the Chinese economy, to be bad for markets.

The rise and fall of oil prices

No matter how much we’d like it to be otherwise, the price of oil still matters because it is a reflection of whether people can afford to heat their homes and run their cars. Today, the oil price is slipping towards $50 a barrel and has dropped over a third in the last quarter of the year. If the oil price stays low it will put money back in people’s pockets, that they can spend on shoes and gin and biscuits. In contrast, if it spikes higher, it could speed up eventual recession. A higher oil price would be bad for markets and vice versa.

Dwindling company profits

In all this chat about China or Brexit or US technology, it is easy to forget that stock markets are really about companies. If companies make profits, their share prices rise, if they don’t, they fall. Most recently, Apple and Samsung have got everyone a bit nervous by saying that their profits will be lower next year. A number of investors have concluded that if bad things can happen to the largest company in the world, they can probably happen to anyone.

However, markets may be worrying unnecessarily. Bill Dinning, head of investment strategy at Waverton, says: “Markets are very worried that the level of earnings growth could come down in 2019. However, even if it was just slightly positive, it would be better than expected and the market might react favourably.”

Politics and populism

While the ‘gilet jaunes’ and the far right in Germany don’t really drive markets, they do drive governments. Governments like being popular and will change policy to stay that way. Governments across Europe (including the UK government) may decide to spend a bit of cash to shore up their popularity.

Bob Jolly, head of global macro strategy at Schroders, says: “Whether it be the more spectacular fiscal splurge of Donald Trump, in the form of substantial tax cuts, or the more measured 2018 budget announcement from the UK government, billed as marking the end of several years of austerity, governments are taking steps to make life easier for their electorates, pretty much globally. Whether it be caused by a rise in populism or improved government finances, fiscal policy is more of a global economic tailwind.” Again, this may counter the threat of recession in the short-term and prop up markets.

These are all important to the direction of stock markets this year. However, it is important to remember that markets are considerably lower than they were. That in itself makes a fall in markets less likely. Investors should take heart.

The personal views in this article belong to Cherry Reynard, who isn't a financial advisor or a Time Lord. Our intention is to show you what might happen this year, not what will, so please don't sell all your favourite stocks because of it.