Are stock markets at a tipping point for a correction?
With sharemarkets in many parts of the world at or near all-time highs, some analysts are wondering if the most likely direction they will take as 2014 proceeds, is downwards.
According to the June 2014 van Eyk Investment Outlook Report, “Monetary policies remain accommodative and stock markets have had a good run recently, reaffirming a number of upward trends. The world equity market recently reached an all-time high and short-term overbought conditions have been evident. Consequently, it could be argued that stock markets are due for a correction or consolidation.
“The problem is that global growth remains fragile, and any move higher in oil prices may be the tipping point for the long-awaited equity market correction. Thereafter, the outlook for markets at this point probably depends more on what happens to oil prices than any other factor”.
The report says oil prices have firmed as the situation in Iraq unfolds, with fighters from the Islamic State of the Levant taking large northern parts of the country including the city of Mosul, and currently threatening Baghdad.
“Iraq is OPEC’s second biggest oil producer at 4 million barrels per day, and a fall in Iraqi output has the potential to stall the fragile global economic recovery and even cause recession in some regions. Iraq was expected to deliver half of the total growth in global oil supply by the end of the decade. This growth is required to meet increasing demand from China and India. Such a boost to output would require a huge investment in production facilities, which now seems implausible as Iraq appears poised to slide into sectarian civil war”.
This oil supply issue, in concert with other factors including an ongoing shortage of available capital in Europe lead van Eyk to recommend investors reduce their exposure to international shares towards what van Eyk labels a neutral strategic benchmark weighting, and adding the proceeds of that to their holdings in cash and alternative investments.
Frequently Asked Questions about this Article…
With global share markets at or near all-time highs, some analysts suggest that a correction could be on the horizon. The June 2014 van Eyk Investment Outlook Report highlights that while monetary policies remain accommodative, short-term overbought conditions could lead to a market correction or consolidation.
Oil prices play a significant role in the stock market's direction. The report indicates that rising oil prices, especially due to geopolitical tensions like those in Iraq, could be the tipping point for a market correction. A decrease in Iraqi oil output could stall global economic recovery and even lead to recession in some regions.
Iraq is OPEC's second-largest oil producer, and any disruption in its output can significantly impact global oil supply. The report notes that Iraq was expected to contribute significantly to global oil supply growth, which is crucial to meet the increasing demand from countries like China and India.
Several factors contribute to the potential for a stock market correction, including overbought market conditions, fragile global growth, and rising oil prices due to geopolitical tensions. These elements combined could lead to a downturn in the markets.
According to the van Eyk report, investors might consider reducing their exposure to international shares and reallocating funds to cash and alternative investments. This strategy aligns with a neutral strategic benchmark weighting, given the current market uncertainties.
Geopolitical tensions, such as the conflict in Iraq, can lead to increased oil prices. The instability in Iraq, a major oil producer, threatens to disrupt oil supply, which in turn can affect global economic stability and stock markets.
Global economic fragility makes stock markets more susceptible to corrections. The report suggests that any significant rise in oil prices could exacerbate this fragility, potentially leading to a market downturn.
China and India's growing demand for oil is a key factor in global oil supply dynamics. The report highlights that Iraq's expected contribution to oil supply growth is crucial to meet this increasing demand, and any disruption could have widespread economic implications.
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