UK Markets closed

3 reasons why the FTSE 100 could crash below 7,000 points in 2020

Alan Oscroft
Arrow descending on a graph

I’m pretty optimistic about the FTSE 100‘s prospects for 2020, but then I’ve always been bullish about shares based on my long-term view. But that doesn’t always work well in the shorter term, so what things might prove my optimism wrong?

Brexit

I have to start with Brexit. Alhough Boris Johnson’s withdrawal bill has passed parliament and we’re finally due to leave on 31 January, we’re still depending on less than a year of negotiations over what kind of trade deal we’ll get with the EU. And now that the PM has rushed into law a prohibition on that process going beyond 2020, fears of reverting to World Trade Organization (WTO) rules are back.

Economists think a WTO situation would seriously damage the economy, and if that happens, it’s almost certain to hurt UK-centric businesses. I can see share prices turning sharply downwards again, with the banking sector being hard hit. I’d also expect a resulting weakening in house prices damaging shares in housebuilders and closely related companies.

A possible upside is that global shares on the FTSE 100 could see their share prices gain if the pound crashes (which I expect it would), as they’re essentially valued in US dollars.

World trade

Resorting to global stocks with worldwide reach might not be much of a safety measure if world trade disputes continue, however. The source of the international woes is Donald Trump’s escalating trade tariff wars with China, where he doesn’t appear to understand how tariffs work. He seems to think that China would pay for the import duties and not American consumers, and didn’t appear to foresee retaliatory actions that are hurting American exporters.

The whole thing is really just setting world free trade back into the dark ages of isolationism and protectionism, and a number of economic commentators are suggesting we’re on the cusp of a downwards turning point for the US economy. Manufacturing output in the US is weakening, and job growth appears to be slowing — and a tough economic spell in the US would affect the whole world and its stock markets, including the FTSE 100.

Earnings downturn

One bright point of 2019 has been the high level of FTSE 100 dividends, with a quarter of the stocks in the index recently offering yields of better than 6%. That’s great for income seekers, and there are plenty of dividend stocks I find very attractive. But everything depends on the reliability of those dividends and the strength of the earnings that lie behind them.

And a number of observers are asking whether we’re heading for a downturn in the earnings cycle and resulting downwards pressure on dividends. If we should see dividends being pared back as 2020 progresses, that could harm sentiment towards stocks in general and pull the Footsie down.

Strategy

What would I do to protect my stock portfolio from these possibilities? Well, nothing, because for one thing I remain a long-term optimist.

I’m just going to carry on with my usual strategy of investing in good companies paying reliable dividends, as they’ll outlive politicians. And who knows — I still think we’ll get an EU trade deal, and there’s a US presidential election in 2020.

More reading

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019