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Last Friday morning, the FTSE 100 It was trading over 7,500 points. A week later, it is now at 7,194 points, down more than 300 points for the week. Here are the main reasons why the stock market crashed, here’s what I’m doing about it.
Expectations of continued price increases
Pressure continues to mount on the Bank of England to raise rates to curb rising inflation. The central bank is now expected to raise interest rates by 0.5% at its next meeting. This takes the base rate to 3%.
Broadly speaking, high interest rates are negative for markets. Because it encourages people to save rather than spend. It also makes the cost of issuing and servicing new debt more expensive for large corporations.
Issues in Europe
The Eurozone is currently struggling to build up enough energy reserves ahead of winter. The price of natural gas and other commodities is still very high. With the vital Nord Stream 1 pipeline operating at reduced capacity, Europe could be in for a harsh winter.
As a result, European stocks fell sharply this week. This has had an impact on the UK market as most FTSE 100 companies have operations or some sort of exposure to Europe.
Political instability
This week is the latest in a back-and-forth between the two Conservative leadership candidates. The next Prime Minister (presumably Liz Truss) will be announced next week. Various headlines and promises have been made from both candidates, but so far there has been little clarity on concrete steps.
I don’t feel this is good for the market as investors want certainty and clear direction. As plans are put in place, we may get a relief rally in the coming weeks. But for now, a cloud hangs over the FTSE 100’s head.
Oil return
Both Brent and WTI crude are down around 7% since Monday morning. This has had a negative impact on global oil and commodity firms listed on the index. As the FTSE 100 is a market capitalization weighted index, large players can cause disproportionate movement.
Therefore, this sector has been struggling this week, negatively impacting the overall index.
My stock market investment strategy
I’m a big fan of buying dip. I recently wrote about this in detail, explaining how this strategy can help me with different types of stocks. For example, a fall in stock price will increase the company’s profit margin. This will help me increase my productivity for my income portfolio.
A fall in value for stocks can cause the price to diverge from the long-term value of the business. This is especially true if the downturn is driven by fear of investors in general rather than actors concerned with actual business fundamentals.
For both income and price prospects, the market may be falling, but that doesn’t mean I’m going to stop buying.