3 reasons the FTSE 100 is falling, and what I’d do next

The FTSE 100 (INDEXFTSE: UKX) has been falling. Here’s why I think that’s happened, and how I’m handling it.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 index of the largest companies listed on the London stock exchange closed below 7,000 last week after flirting with 7,800 as recently as August. That’s a big pullback, so what might be going on? Here’s what I think.

The share prices of the companies within the index are usually driven by earnings. Generally, if a company reports higher earnings, its share price will rise, and if it reports lower earnings its shares will go lower. However, because investors look ahead and buy or sell shares accordingly, they tend to move higher or lower when investors, as a whole, think earnings will rise or fall in the future. When that happens, we tend to talk about investor ‘sentiment’ driving the market.

The market hates uncertainty

When we talk about the stock market, we are really talking about the weight of all the investors participating in buying and selling shares. And one thing the stock market hates more than anything else is uncertainty because it worries about events affecting the ability of companies to maintain or grow their earnings. So, in times of uncertainty, the market tends to assume the worst – that earnings will fall – and so marks down share prices. If the shares within the FTSE 100 fall, the FTSE 100 index will fall as well.

Reason 1

Right now, we have several things causing uncertainty and negative investor sentiment. Perhaps the biggest is the tortuous unfolding of the Brexit process. If nothing else, I reckon Brexit could be keeping a lid on the share-price progress of many companies. Underlying operational progress and advances in annual earnings are often being ignored by the market because it doesn’t know what effect Brexit will have on the firms’ underlying businesses in the future.

Reason 2

Another uncertainty could be the threat of rising interest rates. Governments often raise interest rates to slow down economies if they are getting overheated. The overheating often shows as inflation, so interest rate rises encourage more saving, which helps to control inflation. But higher interest rates can make it harder for businesses to grow earnings because the higher cost of borrowing can reduce investment and output.

Reason 3

I think the biggest factor affecting the FTSE 100 is that markets in America have been falling, such as the Dow Jones Industrial Average (DJIA), the NASDAQ Composite and the S&P500. There’s a long tradition of the stock market indices in Britain following those in the US, particularly when it comes to big moves down.

The market could be worrying too much

Soon though, we will know more about the path Britain will take when it leaves the European Union, and a big chunk of uncertainty will be removed. My belief is that the FTSE 100 index will respond well to that. I also think it will dawn on investors that if interest rates begin a slow ascent, it will actually be because economies are doing well, which bodes well for company earnings. And if economies are doing well, and companies are doing well, the American stock markets are likely only experiencing a correction from an over-valued state, and we are probably not seeing the beginning of a sustained bear market for shares. To me, the FTSE 100, and shares in general look attractive on the London stock market, and I’d use this pullback as a buying opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »