The FTSE 100 and other UK and global markets slumped yesterday. The UK’s main index is down about 2.5% overall this week.
Why did the FTSE 100 crash this week?
On Wednesday it was reported that most US central bank officials are in favour of beginning to wind down its bond-buying program later this year. Central bank support is viewed as fuel for the stock markets. The US making plans to withdraw support might have spooked investors across the globe on Thursday. Also, there are fears of the rise of the delta variant slowing the global economic recovery, particularly in the US and China. Slow economic growth is bad for stock markets.
Today, markets seem to be reacting badly to new regulations in China, affecting the tech sector there, plus all of the above. The FTSE 100 is composed of companies that get their revenues from across the globe. Therefore, global events and concerns tend to move the index along with all the other major indexes.
Last month, I was writing about how fears of inflation were spooking FTSE 100 investors. I think the markets have clearly become more jittery. After the coronavirus market crash in March of last year, the only way was up. Things looked to have gotten about as bad as they could get. Now, the focus seems to have turned to when the good times will end, at least for the stock markets.
What am I doing about the panic in the markets?
Investors are behaving in a very risk-off fashion at the moment. We have bond yields and the US dollar index rising at the minute. This suggests that investors are seeking a haven for their money and turning away from riskier assets like stocks. The bull run in stocks was most definitely risk-on.
I am not prone to shifting my investments around as the mood in the markets changes. In my SIPP, I own global bond funds. These should do well in a risk-off environment. I also own global stock funds, which should do well in a risk-on environment. In my Stocks and Shares ISA, I pick my own UK stocks. It would be a mistake to think that all stocks are the same. Some of my ISA picks are FTSE 100 companies, which tend to move with global events. Others are from the FTSE 250 and AIM 100, which tend to feel UK level events more keenly.
Stocks in the healthcare and consumer staples sectors are more defensive, and their revenues tend to be more stable through the peaks and troughs of the business cycle. Then there are cyclical stocks. These are very sensitive to the business cycle. Sensitive stocks are somewhere between cyclical and defensive.
I believe I have diversification across asset classes (bonds and stocks) and within asset classes across my portfolios. I don’t lean too heavily into one country or sector at the expense of others in my stock holdings. So, when stock markets slump, my ISA might take a hit. But, my bond holdings in my SIPP tend to get a boost. When one sector is doing badly, another one I am exposed to might be doing well. I had tried to time and chase the markets before and failed. A well-diversified portfolio that I can commit to for the long term has not failed me so far.