Today is the third consecutive day of a fall in the FTSE 100 index. The trend may reverse before trading is over for the day, but I think there is a likelihood that it may not. That is because there are genuine reasons dragging the index down.
The economy and the pandemic
Increased taxes is one of them. This was expected, given the huge debt pile that the government has had to take on during the pandemic. It adds to the increases in both income and corporation taxes in this year’s budget.
While I do think that higher taxes are required, they can affect the much needed recovery in the economy as people’s spendable income declines. They also impact companies’ post-tax profits and their budgets. If companies try to pass on the tax increases by increasing prices, right now that is problematic too. Inflation is already a concern. And even higher prices will add fuel to this fire.
It does not help that there is talk of yet another lockdown. Coronavirus deaths in the UK have risen back to their March levels and hospital admissions are rising too. While there is now only speculation of a ‘firebreak lockdown’, it could actually happen in October.
All is not bad for the FTSE 100 index
That said, the index decline is not significant if I consider a longer time period. In September so far, the index is down by only 0.1% from the month before. Of the six full trading sessions in the month, the index rose during three of them. Also, it is up 20% over last year, when we were still in complete lockdown.
Company numbers released recently have been encouraging too. I think this trend will be continued in results released over the rest of the month. With the economy improving fast, greater buoyancy is visible across sectors, which of course reflects in company data as well.
My point here is that the latest index levels do look disappointing. The index levels right now look as if they will fall below 7,000 anytime now. Sub-7,000 levels have not been seen since July. My own portfolio has wiped out significant gains in the past few days. But I also believe that there is a likely floor to how much it will fall.
What I’d do now
In fact, I think the latest decline is a buying opportunity. Many FTSE 100 stocks have run up significantly in the past 10 months, since the vaccines were developed. They have been trading at a premium for some time now. I think this broad-based decline is exactly the time to buy these stocks on dips.
I am inclined to consider utilities, which are a good hedge in case we see a pandemic surge once again. But if the economy keeps showing sharp growth, construction companies should benefit, which have also seen lower share prices today so far. And there are plenty of other options too.
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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.