Last Friday morning, the FTSE 100 was trading just above 7,500 points. A week later, it’s now at 7,194 points, down over 300 points in a week. Here are some of the main reasons why the stock market is falling, along with what I’m doing about it.
Continued rate hike expectations
Pressure is continuing to build on the Bank of England to raise rates at a quicker pace in order to stem rising inflation. It’s now anticipated that the central bank will raise interest rates by 0.5% at the next meeting, along with two further increases by the end of the year. This would take the base rate to 3%.
Broadly, higher interest rates are negative for the market. This is because it encourages people to save instead of spend. It also makes the cost of servicing and issuing new debt more expensive for large corporates.
Issues in Europe
The Eurozone is currently battling to build enough energy reserves ahead of the winter. The prices of natural gas and other commodities are still very high. With the important Nord Stream 1 pipeline operating at a reduced service, Europe could be in for a tough winter.
As a result, European stocks have fallen heavily this week. With most of the FTSE 100 companies having operations or some kind of exposure to Europe, this has had a knock-on impact in the UK market.
Political uncertainty
This week has been the final one of back-and-forth between the two Conservative leadership candidates. The next Prime Minister (predicted to be Liz Truss) will be announced next week. There have been various headlines and promises from both candidates, but little clarity on concrete steps so far.
I don’t feel this has been great for the market, with investors wanting certainty and clear direction. We could get a relief rally in coming weeks as plans are implemented. But for the moment, it’s a cloud hanging over the head of the FTSE 100.
Oil pullback
Both Brent and WTI oil are down around 7% from Monday morning. This has negatively impacted the global oil and commodity firms that are listed on the index. As the FTSE 100 is a market capitalisation-weighted index, large players can cause a disproportionate move.
So with this sector struggling this week, it has negatively impacted the entire index.
My stock market investment strategy
I’m a big fan of buying the dip. I recently wrote about this in more detail, explaining how this strategy helps me with different kinds of stocks. For example, a fall in a share price boosts the dividend yield of a company. This helps me to increase my yield for my income portfolio.
For value stocks, a fall can cause the price to dislocate from the long-term value of the business. This is especially true if the slump is driven by investors being fearful about things in general, rather than actors specifically linked to the actual business fundamentals.
For both income and value prospects, the market might be falling, but this doesn’t mean that I’m going to stop buying.
