When stock market trading started yesterday, the FTSE 100 index fell by over 2% from the last close. It recovered significantly over the rest of the day, though it still ended weak. So far, it is experiencing another weak day today.
On the face of it, the market slip can look like a red flag. Possibly even the start of another crash. This is especially so when we look at it in conjunction with rising coronavirus cases and the likelihood of continued tapering of quantitative easing policy.
The big picture is positive
I think we could not be farther from the truth though. There are still plenty of positives in the UK’s stock markets, when we look at the bigger picture. On average, the FTSE 100 index is actually up by 1.4% in August from the month before. It is also the fourth consecutive month that it has stayed above 7,000 on average. And this is also the highest monthly number seen since the market crash of last March.
This in no way looks like the makings of a crash to me. At the same time, it bears exploring why the stock market has been weak since yesterday. The FTSE 100 index did decline by 1.5% yesterday, the biggest fall in a month. Here, I think it is essential to consider which stocks fell yesterday.
All about dividends
The biggest faller was the mining giant Anglo American, which fell by 10%. There was no real news from the company, so it did appear out of the blue. Except, when we consider its dividend dates. The miner went ex-dividend yesterday, which means that investors who buy the stock now will not be eligible for its next dividend payment. Also, if I have held the shares up to now, if I sell them, I still get paid a dividend.
And it was hardly the only FTSE 100 stock to go ex-dividend. It was just one of 13 of the index’s constituents to do so. When seen from this perspective, it is not surprising that the markets corrected yesterday. While there may be macro concerns at the back of investors’ minds, I see it as a technical movement more than anything else.
In fact, based purely on this aspect, I would expect another weak day for the market next Thursday, 26 August, as six more stocks go ex-dividend. These include the insurance biggie Aviva and alcohol manufacturer Diageo.
Macro risks ahead
I do think, however, that we need to watch out for developing risks. Yesterday I talked about how China’s slow down can impact FTSE 100 stocks, for instance. Inflation is another risk that keeps rearing its head. And of course, the pandemic really is not over yet.
That said, I am an optimist. The economy is getting better and incoming corporate results are increasingly proof of that. Investors are bullish, as evident from rising markets and the risks, so far, are under control. I am still buying stocks, as I think the likelihood of a stock market crash is low.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.