short fall in stock markets

8/2/2019 Short Fall in Stock MArkets

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Reasons of the recent short fall in the global stock Markets Page 1

SECURITY ANALYSIS& PORTFOLIO MANAGEMENT

Topic:

The Recent Short Fall

In The Global Stock Markets

MBA-IV (Finance)AX

Members are:1. Andleeb Nazar 09011920-0842. Asma Shifa 09011920-0833. Sana Mukhtar 09011920-0624. Samreen Bari 09011920-0945. Nadeem Noor 10001920-002

Submitted to:

Sir Ameer Saeed Butt


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1.Introduction:High volatility in the markets seems to have become the norm lately. Equity marketsaround the world have whipsawed investors, as the indices swing wildly up and down inroller-coaster fashion. And the unruly changes from one day to the other are not small.When the Dow shed 520 points in a day last week, it represented a loss of $1.6 Trillionin capital for equity holders.

2. Reasons of the recent short fall in the global stock MarketsThere are many reasons for the recent high volatility in the markets

A major cause was the US debt ceiling deal. The markets sold off sharply when the deal was announced, which surprised

some that thought that that raising the US debt ceiling would have a stabilizingeffect and save the nations AAA credit rating.

The markets reacted negatively on news of the deal, and by selling off onThursday, August 4th, correctly anticipated Standard and Poors decision of

Friday, August 5th to downgrade, for the first time ever, the credit rating of USsovereign debt.

In its press release, S&P said that political brinkmanship in the debate over thedebt had made the U.S. governments ability to manage its finances less stable,

less effective and less predictable. It said the bipartisan agreement to find at least$2.1 trillion in budget savings fell short of what was necessary to control thedebt over time and predicted that leaders would not likely achieve more savingsin the future.

The debt deal ducked the central issue, namely reducing runaway governmentspending.

Failure of the US government to solve its debt crisis was not the only factor thatroiled the markets last week. A slew on new unfavorable economic data also

pressured stocks. Consumer Sentiment, a key indicator of consumer demand,plunged in August to the lowest level since May 1980, adding to concern thatweak employment gains and volatility in the stock market will cause householdsto retrench.


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The Thomson Reuters/University of Michigan preliminary index of consumersentiment slumped to 54.9 from 63.7 the prior month. The measure was expectedto decline to 62, according to the median forecast in a Bloomberg News survey.

Unemployment remains high at 9.1% with no signs of improving. Food and energy costs continue to rise; buying power of the Dollar is shrinking,

and wages are not keeping up with rising household costs.

Housing values continue to fall, while rents are rising. Fears of insolvency in Italy, Spain and maybe France and the uncertain response

by the ECB also weighed on investors. European markets sold off, and the USmarkets followed with more selling.

One reliable measure of market volatility is the VIX Index. VIX is the ticker symbol for

the Chicago Board Options Exchange Market Volatility Index; it measures the impliedvolatility of S&P 500 index options. We can see at once that the VIX reflects marketsentiment. When the VIX is high, markets tend to swoon. When the VIX is down, themarkets tend to gain. We see this dynamic in the chart below. Just before the marketsell-off of 2008, the VIX reached 80. The VIX also climbed to 48 in May 2010 andreached 48 again last week, each time corresponding to big sell-offs in the S&P 500.

We can see how a portfolio that is diversified with gold performs well when the markets

are volatile. Gold tends to be much less volatile than the general markets. Because gold

has intrinsic value, gold is considered the premiere safe-haven asset. In uncertain

economic times, investors cash out of stocks and low-yielding bonds and purchase gold.


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Significantly, today we are seeing the central banks are buying bullion. The World Gold

Council's most recent figures show central banks are net buyers of bullion.

So how does gold hold up for the individual investor in volatile times? The answer isstraightforward: Gold outperforms the markets in turbulent times. We can see theevidence in the chart below. It compares price action of the Dow vs spot gold over the

last few months.

What is significant here is highlighted in the oval. It shows the 13% decline in the Dow

in last weeks big sell-off, and gold climbing to over $1800/oz. Investors that have

owned gold in a diversified portfolio protected their wealth, while those that relied on

stocks were savaged by the sell-off. The DJIA has lost 1.18% year-to-date. The S&P500 has lost 4.54% year-to-date.

3. RecommendationsBuying and selling stock is a common method of building wealth over time. A share ofstock represents a small portion of ownership in a company. If the value goes up,investors can sell their stock to make a profit. Stock market investing is inherently risky,since stocks can unexpectedly rise or fall in value. There are ways, however, to mitigaterisk.

3.1: Invest Long Term

Aim to invest in the stock for a year or more before selling. Stock prices fluctuate on adaily basis and normal market cycles can cause stocks to rise and fall in the short term.Long-term investing serves to limit the effect of short-term price fluctuations. Accordingto CNN, stocks have historically outperformed other investments over the long term.Another advantage of investing for a year or more in stock is you pay long-term capital


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gains tax (up to 15 percent) on profits, as opposed to short-term rates that equal yourregular income tax rate.

3.2: Diversity

Diversification is the practice of buying several different stocks to spread risk over many

investments. Failing to diversify can result in a situation where you have all your fundsin just a few stocks. If those stocks lose value, you stand to lose a large amount ofmoney. Buying stock in different industries and purchasing international stocks will alsohelp to diversify your portfolio.

3.3: Pay Attention to Fees

Whenever you place a stock trade with a broker or an electronic trading service, youprobably pay a transaction fee. Fees can add up over time, especially if you buy and sellstocks frequently. You should know exactly how much your brokerage service chargesto make trades and factor the cost into your decisions. It may not be worth investing a

small amount, like $500, if you must pay $15 in transaction fees.

3.4: Research Before You Buy

One of the keys to smart investing is researching investments before buying. If you don'tunderstand how a company provides value, it may not be a good investment. Be wary ofadvertisements for investment that promise high returns. Any deal that seems too goodto be true might very well prove problematic. Be wary of purchasing stocks with verylow share prices (penny stocks), since they're often small, unproven companies that havevolatile stock prices.

4: Referenceshttp://www.ehow.com/info_7965201_recommendations-buying-selling-

stock.html#ixzz1VBef2mZ3
http://www.ehow.com/info_7965201_recommendations-buying-selling-stock.html#ixzz1VBef2mZ3http://www.ehow.com/info_7965201_recommendations-buying-selling-stock.html#ixzz1VBef2mZ3http://www.ehow.com/info_7965201_recommendations-buying-selling-stock.html#ixzz1VBef2mZ3http://www.ehow.com/info_7965201_recommendations-buying-selling-stock.html#ixzz1VBef2mZ3

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