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3 reasons why the FTSE 100 is crashing

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Having enjoyed a good few weeks of positive momentum, the FTSE 100 index has fallen heavily this morning. As I type, London’s top tier is down 2.2%. While that may not seem like much compared to the market crash of March 2020, it’s still enough to raise the eyebrows of even the most sanguine of investors.

Let’s look at a few reasons why this might be happening.

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FTSE 100: what’s going on?

Perhaps the most prominent of these is news that the Federal Reserve is considering pulling back on its stimulus support for the US economy. It’s not so much that this is a surprise to global markets as it was always on the cards, given rising inflation across the pond. Consumer prices hit a 13-year high in June. 

No, what’s got traders in a twist is how quickly this tapering might happen. Right now, there’s speculation this could occur in the last quarter of this year or the first quarter of 2022.

Some seem to think this may be too soon given that recent data has shown consumers are still behaving cautiously. As always, the markets hate uncertainty and US indices fell yesterday. Seen from this perspective, the FTSE 100 is merely playing catch-up.

Covid-19 concerns

Another reason for the lead index having a rough morning is news of rising Covid-19 infection levels around the world. Aside from the health implications, this has a knock-on effect on other things. 

One example of this is the price of oil. This has been steadily falling for a few days on fears that the Delta variant may put economic activity into reverse and demand for fuel will follow. This is, after all, what happened last year as stockpiles jumped amid widespread lockdowns. 

A reversal in the price of oil is clearly not great news for FTSE 100 giants Royal Dutch Shell and BP. Due to their relative size, they have a bigger impact on the direction of the index than those lower down. 

Ex-dividend day

An additional, a more benign explanation for why the FTSE 100 is struggling relates to a good number of its constituents going ex-dividend. This is when a stock trades without the value of its next dividend payment. In other words, investors who purchased a stake in these companies before today will now receive the next cash payout, while those buying today won’t.

Given that the FTSE 100 remains a great hunting ground for big dividends, it was always possible this could have an impact on today’s performance. The timing just isn’t great.

Should Fools worry?

A sudden drop in the FTSE 100 like we’re experiencing today can test the nerves. It’s never pleasant to see many/all of one’s holdings fall in value.

Personally, I’m not worried. Counter-intuitively, it’s the days where individual stocks that I own are crashing that make me jittery. When pretty much the whole market falls in unison, I can be pretty sure that the underlying businesses that I own haven’t changed all that much.

In spite of today’s tumble, it’s also worth remembering that the FTSE 100 is almost 15% above where it stood in August 2020. 

As a long-term investor, I know that one of the best things to do in times of trouble is to get greedy. So, if I’m going to do anything today, it will be to take another look at my wishlist of UK stocks. 

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Paul Summers 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.

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