Reasons for slowdown in the World Capital Market in 2008

The beginning of the year 2008 saw slowdown in the capital markets all over the world. Starting from developed Nations like US and Japan to India and China the stock market indices experienced a huge drop. Some researchers say that one of the major causes of this recession is the overall increase in the general price level which is clearly visible across all sectors of the economy all over the world. While there are others who have the view that it is due to the upcoming US elections that are due in November 2008. Inflation is no doubt an important factor influencing fall in the stock market. Because of this inflation, cost of production rises. Now as the cost of production rises, price of goods rises. As per simple economic law of demand, as price rises demand falls. This fall in demand will result in the fall in revenue and hence the profit margin of the firms. This reduction in profit margin of the firms will influence stock price to fall.

The most important factor which is causing inflation is the rising price of crude oil all over the world. This rise in oil price is causing transportation cost to rise, which in turn is accelerating the general price level.

Again if we consider from the point of view of US elections, the two major parties that are contesting the election are the Democratic Party headed by Barack Obama and the Republican Party headed by John McCain. If Democratic Party comes to power, then as promised by Obama, there would be no outsourcing from US to the developing countries like India and China. This will lead to slowdown in growth of the Service sector in these countries and hence a fall in the stock price in the capital market. To prevent such risk International investors are in the process of taking out funds from the capital markets of these developing countries. Now with the taking out of funds, there is an excess supply of these stocks in the market, leading to an a fall in the price of individual shares which in turn is pushing the stock market indices down in these countries. Moreover there has been economic slowdown in the US resulting in a downtrend in the US capital market too.

Now the question is: Will this slowdown in the stock market continue in the years to come?

The answer is obviously no. This is because, History says that with time the income of people had risen and it will continue to do so in future. This rise in the income of the people will raise the general price level and so there will be always some inflation. However, in the present scenario, inflation has risen too much, leading to fear among the investors, who are now in the process of withdrawing their money from the stock markets. Now the Central Banks across the globe has already resorted to various monetary policies to control inflation, which will definitely bring down inflation in the months to come as it has happened in the past. Moreover International investors are looking forward to the US election in November 2008. As soon as the election gets over, new investments will definitely trigger from the beginning of the New Year 2009 or probably from the beginning of the next financial year i.e, April 2009. Small and long term investors should therefore focus on investing during this year, as they will be getting large cap stock at a high discount and hence when the stock market takes a positive turn at the beginning of the New Year, they will get their money back with high premium.