Global markets drop again - Are you diversified?

August 1, 2007

Last week, global stock markets took the steepest dive since the 5-9% decline in early March. (See Global markets decline, 3/7/07) Here is a snapshot of the damage done:

U.S. Indices

• Dow Jones Industrial Average - declined 773 points, or 5.5%, since its all-time high of 14,039 reached during the day on Monday.
• NASDAQ - fell 5.3% to 2,562.

European Indices

• DAX (Germany) - dropped 493 points, or 6.2% from Monday's high of 7,944.
• FTSE (UK) - declined 409 points, or 6.2%, since Monday's high of 6,624.

Asian Indices

• Shanghai (China) - fell 126 points, or 3%, from its Monday high of 4,220.
• Hang Seng (Hong Kong) - dropped 819 points, or 3.5%, from Monday's high of 23,389.
• Nikkei 225 (Japan) - declined 726 points, or 4%, since Monday's high of 18,009.

Experts blame the drop on the collapse of the leveraged buyout (LBO) market, which was represented by the Blackstone Group.  (China invests $3B in U.S. company, 5/23/07) Blackstone's share price has plummeted 22% from its IPO price of $35 per share on June 22.

What the 2007 global stock market decline means:
Last  week's sell-off focused primarily in the U.S. and Europe, while the March decline focused in China and Asia. That's because the credit tightening crunch is worse in the Western world.

In fact, European stocks continued to decline this week, as concerns about credit tightening continued. Interest rates in Europe are higher than in the U.S., thanks to continued ECB and Bank of England credit tightening. (See New Prime Minister Gordon Brown, 7/4/07)

All markets have risen to higher highs since the March sell-off. For example, China's stock market is almost 80% higher than it was after the drop in March.

However, a global market drop of around 5% that follows so soon after the March sell-off, and occured within a 5-day period, means that stock market volatility is increasing. This is typical as the stock market approaches its top. Unfortunately, no one knows when the top will occure. It may have already been reached, or it may not occur for another few months or possibly even years.

Action Steps:
Expect wild swings in the global stock markets as volatility increases and the markets approach the top.

The best way to withstand market volatility is with a well-diversified portfolio. Find out how to protect yourself with my home study course, “Retirement Planning 101.” This course will guide you through building a diversified portfolio using the same steps I took to retire at age 50.

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