When I woke up on Monday morning, the sun was shining and I was in a positive mood. The FTSE 100 index also seemed to share my optimism, and traded above 7,100 points. This has reflected the steady move higher over the past year that has seen the index gain almost 1,000 points in the process. Unfortunately, the positivity ended on Monday. The FTSE 100 crashed below 7,000 points on Tuesday, and is down another 2%+ already today. What’s going on?
A key driver of the FTSE 100 crash is rising inflation expectations. Investors are catching on to the likelihood that inflation could to start moving higher. This is because the recovery from Covid-19 is gaining traction. Here in the UK, lockdowns are easing and businesses are largely back to operating freely. As activity and spending picks up, inflation usually follows.
Rising inflation from a low starting point isn’t a bad thing. But the Bank of England targets 2% inflation, with other developed markets roughly targeting the same level. So if it rises too quickly towards (or beyond) this level, the BoE may be forced to take action. This would likely mean raising interest rates.
Higher interest rates makes it harder for companies with debt to refinance or issue more debt. Within the FTSE 100 index, there are very few companies that don’t have net debt. So logically the market is falling as this chain reaction is being thought through.
Another reason for the crash in the FTSE 100 index this week is concern by another group of investors. Instead of being worried about a recovery and rising inflation, they are concerned about the fragility of the global economy.
Late on Friday, the US Non-Farm Payrolls employment figures missed expectations massively. Couple this with the situation in India and the potential for its Covid variant to hit other countries.
I might wonder why these factors would specifically hurt the FTSE 100 index. In truth, over the past decade global stock markets have become more and more correlated. So if markets in Asia and the US fall, there is a high likelihood that the FTSE 100 will fall as well. Along with the correlation, it’s important to remember that most of the companies in the index are international in their operations.
Buying cheap FTSE 100 stocks
So what should I do about this crash? Personally, I think slumps are always going to happen as the market cannot go up in a straight line. I’d be selective in what I buy right now, but I do see opportunities.
For example, I’d stay away from highly leveraged companies, and companies that have a large exposure to the US and India. I wrote earlier in the week about how I like the look of Flutter Entertainment and Rightmove. These two stocks have lost ground this week, but I have an optimistic long-term view on both.
The post The FTSE 100 index has crashed another 2% today. Here’s why appeared first on The Motley Fool UK.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK owns shares of Flutter Entertainment. The Motley Fool UK has recommended Rightmove. Views expressed on the companies mentioned 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 2021