Is this the start of a stock market crash?

Global markets have the jitters again, with the US Dow Jones slammed down 2.1% on Friday, the broader S&P 500 was down 2.5% as was the NASDAQ.

European markets fared a little better, with the UK’s FTSE 100 losing 1.2% while the German DAX lost 1% and the French CAC 40 fell 1.1%.

It was the US market’s worst performance since Britain voted to leave the European Union in late June 2016. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) dropped by 3.2% on June 24 when it became clear the shock decision was to leave.

It might be hard to believe, but the S&P/ASX 200 has rallied more than 6% since then.

But as usual, markets lurch from one crisis to another. If it’s not Greece, or US interest rates, its fears about China’s growth or perhaps a recession in Australia.

It pays to remember that despite terror attacks, bombings, natural disasters, the GFC, the 1987 stock market crash, a recession, the introduction of the GST, several wars, a ‘Grexit’ and ongoing issues in Europe and negative bond yields, the S&P/ASX 200 (PDF) has still managed to clock up an impressive compound annual return of 9.6% over the past 30 years, while international shares are up 7% over the same period.

$10,000 invested in 1986 would now be worth $154,405 if dividends were reinvested – a strategy we outlined last week.

The fear that markets are experiencing now is how economies will cope with interest rates heading higher. After years of low and in some cases negative interest rates in some parts of the world, the US is looking to start increasing interest rates. European Central Bank president Mario Draghi also appears to making moves to reduce the Eurozone’s reliance on fiscal stimulus measures.

It’s no coincidence that lower interest rates have seen investors pile into the equities markets and other higher-yielding assets in search of the best returns.

Investors obviously fear that higher interest rates could see a stampede out of those markets into other assets like cash and bonds. Should a sell-off occur, the first stocks likely to be hit will be the large cap blue chips like the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC).

Foolish takeaway

An orderly, slow and timely increase in interest rates is unlikely to trigger a stock market crash. Keep calm and carry on as you were.


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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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