The writer is one of the owners of Meitav Investment House. The investment house also manages, among other things, mutual funds. The above should not be considered a recommendation or a substitute for the reader’s independent judgment, or an invitation to make a purchase or investments and/or any operations or transactions. The information may contain errors and market changes may apply
The stock markets in the world have been moving in recent days like mania-depression percentages. For example, on the day the US price index was published, Thursday October 13, which was higher than the markets expected, the American stock market crashed in response by about 3%, only to end the day with an increase of about 3%. Such an event, gap Intraday of about 6%, is an unusual event that happens almost once in a generation.
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● Buds of optimism: the report season that began in the US provides clues to the direction of the markets
Seemingly, there is no good explanation for these sharp fluctuations, for this tremendous struggle for the direction of the market between buyers and sellers. So what caused this vertigo in the markets after all? The underlying reason is the enormous uncertainty surrounding the global economy, but the “immediate suspect” is to be found in what happened in Britain.
The new Prime Minister, Liz Truss, who managed to resign on Thursday, and her Minister of Finance until last Friday, Kwazi Kwarteng, announced at the beginning of the month an economic plan to subsidize the price of electricity consumption by setting a ceiling on the cost for households, and canceling the high tax rate of 45 % on the highest income class. The plan did not indicate the sources, that is, how the British government is preparing to finance the economic moves it has outlined, which means much more deficit.
The markets didn’t like the plan, and the first two markets to reflect this were the currency market and the bond market. The pound lost a lot of its strength against the dollar and fell from around $1.16/pound to a low of $1.06/pound within a few days. .
A 20% drop in less than a month in 10-year bonds
The second market was the bond market. Fears of a huge increase in the deficit, along with fears of even higher inflation and, as a result, more aggressive interest rate hikes, drove UK government bond prices down by such sharp rates (10-year bonds fell within less than a month to nearly 20%), until there was a real danger to the (leveraged) pension funds of Great Britain, something that no government can afford.
So what happened after all that resulted in a reversal of gains on Monday in the markets? Finance Minister Kwarteng was invited to resign, and paid with his throne for his hasty, and in the opinion of many also delusional, economic plan. And the resigning prime minister Taras – in order to save herself from the failure – hastened to appoint a new finance minister, Jeremy Hunt, who conveyed to the markets that the economic plan he was going to present was not only different from that of his predecessor, but to a large extent the opposite of it. He will not abolish the high tax rate of 45% nor will he abolish the 25% tax on corporations, which was intended to be reduced to 19%. The markets already liked this and reacted strongly.
In the foreign exchange arena, the pound recovered, in the bond arena, prices rose strongly, and once again – the world’s stock markets reacted strongly, but this time positively.
Some lessons for investors from the British story
But in the meantime, there are some important lessons for investors to take away from the British story.
First, you shouldn’t marvel at the lifts of one, two or three days, just as you shouldn’t enter a black hole after a few days of descents. The direction of the stock market in the coming months will be influenced by many factors, most of them negative.
Secondly, the factor that will most of all determine the fate of the stock markets is precisely that of the bond markets, which currently provide investors with a reasonable return. Price drops in this market, which means an increase in the yield to maturity that investors can receive, create and will create even tougher competition for the stock markets, especially if the companies They will have difficulty dealing with high inflation and rising interest rates, and will not be able to compensate for them in their reports.
Thirdly, and this is a lesson that is also not one-time or one-off – a government, and a finance minister, whoever he is, and however powerful he may be, cannot act as he sees fit. If the markets don’t like the plan, they have a way of saying so and showing him the way out, and it happens quickly before he realizes what he did wrong.
Gone are the days when finance ministers were omnipotent. In Israel this was the situation about 40 years ago, when the Treasury, not the markets, determined that there would be a devaluation. Since Israel became part of the global village, here too it is not the finance minister who is the strongest but the markets.
The fourth point is an outgrowth of the previous point, and it is also the most important lesson: the basis of the markets’ behavior is trust in the credibility of those who lead the economic policy. If confidence is shaken, markets crash.