Tuesday, November 5, 2024

FTSE 100 slumps: Why stock markets are sliding and what it means for investors

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The FTSE 100 nosedived today as a global market sell-off sparked by US recession fears continued after the weekend.

A sell-off on the London stock market this morning sent the FTSE 100 down more than 2 per cent, to fall below the 8,000 mark, as spooked investors fled to safety.

Japan’s Nikkei index at one point suffered its biggest crash since its 1987 ‘Black Monday’ loss, closing down 12 per cent.

Jittery investors will be nervously awaiting the open of US markets this afternoon, with futures pointing to a further slump.

But why has the stock market suddenly tanked and what could it mean for your investments? We explain. 

Market rout: Japan’s Nikkei index suffered its biggest loss in decades as global markets plunge

What’s happened to global stock markets?

Global stocks are on shaky ground as indices suffered huge losses when markets opened on Monday morning.

Japan’s Nikkei closed 12.4 per cent lower, while its Topix index lost 2.48 per cent. The steep sell-off triggered circuit breakers which halted trade on stock exchanges across Asia.

European stocks also tumbled with France’s CAC currently down 1.9 per cent, Spain’s Ibex down 2.52 per cent.

At 11.40am, the UK’s FTSE 100 was down 2.3 per cent, at 7,984 while the FTSE 250 was down 3.2 per cent at 20,826. The broader FTSE All Share was down 2.5 per cent.

It comes after US stocks declined on Friday while US Treasury yields fell below 4 per cent for the first time in six months. The S&P 500 fell 2.5 per cent on Friday, while the tech-focussed Nasdaq fell 2.8 per cent and after a recent 10 per cent decline is in correction territory.

DIY investment platform Robinhood halted 24 hour trading for its customers in the face of increased volatility.

Snapshot: The UK's main markets were a sea of red on Monday morning

Snapshot: The UK’s main markets were a sea of red on Monday morning

Why have global markets plunged?

The pullback in stocks comes hot off the disappointing US jobs data on Friday, sparking fears that the US economy could fall into a recession rather than achieve the soft landing investors have been banking on.

Employment data showed that the unemployment rate ticked higher, while employers added far fewer jobs than expected.

At the same time, the Federal Reserve voted to hold rates last week while other central banks, like the Bank of England, cut interest rates.

Goldman Sachs analysts increased the chances of a recession from 15 to 25 per cent in a note to investors. 

Investors are worried that US inflation has proved stickier than anticipated and the Fed more reluctant to cut rates than expected. Signs that the US economy is slowing, which has not been priced in, then spooked markets.

AJ Bell’s investment director Russ Mould says that many equity markets have priced in inflation cooling and rate cuts from the Federal Reserve.

He said: ‘Any deviation from that path could therefore lead to trouble – either stickier inflation, economic and earnings disappointment of slower-than-expected rate cuts.

‘If anything markets were more concerned about it overheating earlier this year,’ says Mould. ‘Those with long memories will remember how frantic rate cuts in 2000-02 and 2007-8 failed to stave off a bear market in stocks’.

The US stock market’s increasing concentration in the so-called Magnificent Seven tech companies, who have largely seen their share prices soar on the back of high expectations for artificial intelligence, has exacerbated volatility.  

Elsewhere, the sell off in Asia came as the Japanese yen strengthened against the US dollar, making goods more expensive and therefore less attractive for overseas investors.

A lot of the market volatility has been influenced by the carry trade, where investors borrow in low-yield currencies to invest in higher-yield ones.

The yen has been particularly popular for this as a major source of global liquidity, so the Bank of Japan’s decision to increase rates to 0.25 per cent, their highest level since the 2008 financial crisis, has spurred volatility.

‘The yen is rallying, as massive short positions against it are closed out, to drive the currency higher still and force yet more liquidation by the shorts, to create a circle every bit as vicious as it had previously been virtuous,’ says Mould.

What does this mean for interest rates?  

 The Bank of England cut interest rates last week but the US Federal Reserve is the kepy player in global markets and it has so far held firm.

Central banks adjust interest rates to control inflation and support the economy and should not be influenced by shares falling, but the Fed will be keeping an eye on markets. 

Goldman Sachs now expect rate cuts in September, November and December. It said: ‘The premise of our forecast is that job growth will recover in August and the FOMC will judge 25 bp cuts a sufficient response to any downside risks.

‘If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September.’

JP Morgan is pricing in a 50 per cent probability of a US recession and expects a 50 basis point cut in September, and another in November.

What’s happening to UK markets?

Markets in London haven’t escaped the sell off, with both the FTSE 100 tumbling from near record high territory early last week to below 8,000. 

Danni Hewson, AJ Bell’s head of financial analysis said: ‘For the more domestically focussed FTSE 250 the whisper of US recession fears has bumped up against concern about the level of violence that’s been seen in some UK towns and cities over the weekend.

‘Horrendous scenes of hotels on fire and streets littered with debris are likely to impact consumer confidence and footfall levels, which are crucial to retailers and hospitality venues.

‘Then there’s the potential insurance claims stemming from the damage inflicted by flying bricks and Molotov cocktails.

‘For a UK economy struggling to find growth this chapter, particularly at this time, is a massively unwelcome one.’

The bigger picture: The FTSE 100's share price performance over the past 14 years - total returns are higher due to dividends paid out

The bigger picture: The FTSE 100’s share price performance over the past 14 years – total returns are higher due to dividends paid out

What should investors do?

The most important piece of advice to investors when markets sell off is not to panic. Invariably, by the time investors know the market is tanking, it is already too late to avoid the slump.

While markets are understandably spooked, analysts have issued words of caution to investors looking to sell on the back of the US jobs report.

Sam North, market analyst at eToro, says that while markets have reacted badly to the lack of a rate cut and the jobs data, they had been riding high and this is likely to be a blip.

He said: ‘Trends are more important than single reports. The unemployment rise was mainly due to temporary layoffs from Hurricane Beryl, which should reverse next month. Even if the jobs report signals bigger issues, the Fed has tools to respond.

‘Solid earnings growth is another reason to not panic. With most of the S&P 500 reporting, earnings are up 11.5 per cent annually, the fastest since late 2021, and revenues have grown for 15 quarters straight. 

‘Strong economic growth also supports optimism. US GDP grew by 2.8 per cent in the second quarter, continuing a trend of over 2 per cent growth in seven of the last eight quarters.’

What to do when markets fall 

Sharp falls in the worry investors but corrections are natural for markets, which don’t rise in a straight line, writes Simon Lambert.

Some of the biggest falls in history fade into relative insignificance when you look at long-term stock market charts.

The most important thing for investors to do is to avoid panic moves, which can lead to selling out at a low and missing out on a rebound.

Here are three tips for investors looking to calm their nerves. 

Do nothing: Not reacting to market sell-offs is usually the best course of action you can take. Studies repeatedly show that individual investors manage to underperform stock markets, as they tend to react badly and sell out when stocks are low and buy when they are high.

Don’t constantly check: Investing is for the long-term, so checking stocks and shares values on a daily basis is a recipe for trouble. If you do check your portfolio and feel compelled to act, don’t do so immediately. Take a step back, discuss what you are thinking of doing with someone, or write it down – evaluate it carefully and consider is it the right move. 

Acknowledge your emotions: Greed and fear are the emotions that trigger rash investing behaviour, but it is only natural to feel them. Accept that your feelings when you see markets slump – or soar – are part and parcel of being human but remember that you can control whethe you react.

To sleep easier at night as an investor, consider these five things: 

1. Don’t put all your eggs in one basket: A diversified portfolio can protect you when market storms arrive – don’t be over-exposed to one stock, fund, sector or market.

2. Harness the power of dividends: A large part of the long-term returns from stock market investing comes from reinvesting dividends and letting growth compound over time.

3. Be brave when others are fearful: Treat market falls as an opportunity to buy investments at a lower prices. Think of it as the stock market being on sale rather than your investments being in a slump.

4. Keep saving regularly: Regular monthly investing allows you to slowly and steadily build up your portfolio and avoid sudden lurches in the market that can affect lump sums put in just before a slump.

5. Don’t stop: Studies show that the longer you invest for the lower your chance of losing money over any given time period. Don’t give up and pull your money out. And if you rely on your investments for income, avoid taking out large sums when markets are down. 

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