The Motley Fool

The FTSE 100 has dropped below 7,000 points! Here are 3 reasons why

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.

Businessman looking at a red arrow crashing through the floor
Image source: Getty Images.

On Friday, the FTSE 100 dropped almost 1% to close the week at 6,963 points. This is notable because ever since the market broke above 7,000 points back in the spring, there have only been two meaningful dips below this level. In order to keep the longer-term trend intact, the market ideally needs to recover swiftly. To help understand if that can happen, these are the reasons why the market has been jittery.

Inflation fears are back

The previous fall mentioned above was back in July. There were five days of downward movement in the FTSE 100, from around 7,100 points to just above 6,800. I wrote at the time about the main reasons that I saw for the crash. In short, rising inflation fears and rising Covid-19 concerns.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Rising inflation fears are back again. Last week, we heard that the year-on-year UK inflation figure was 3.2% for August, the largest jump since records began. Although some of this was due to the Eat Out To Help Out scheme from last summer that subsidised dining-out prices, it’s still a large figure.

The concern is that higher inflation will force the Bank of England to raise interest rates. This will increase the cost of borrowing for FTSE 100 companies. Given that the vast majority of companies in the index have debt, this is a negative for their share prices. 

Falling iron ore prices

Another reason for the fall below 7,000 points was the index being dragged down by a few large firms. These were mainly commodity stocks including Anglo American, with a share price drop of 8% on the day. This was due to falling iron ore prices. With concerns over the future of China and lower demand, the large commodity stocks tumbled for much of last week.

The FTSE 100 has several large mining companies, including Rio Tinto and BHP Group. So when a negative issue impacts the whole industry, stocks in this area drag down the broader FTSE 100 index.

Keeping an eye on the FTSE 100

Finally, a third reason for the slump last week was more of a technical one. On Friday we had something known as ‘quadruple witching’. This refers to the day when financial derivatives, such as futures and options, all expire together. In short, the rare times during the year that this happens, the volume of stocks being bought and sold is huge. This invariably leads to large volatility as investors either buy or sell stocks to satisfy the ending requirements of their financial contracts.

On balance, the third reason isn’t one that overly concerns me. It’s the inflation story that I think could be the lingering issue and could cause more downward pressure on the FTSE 100. Clearly, I don’t have a crystal ball, but I think the next couple of weeks could be interesting to watch.

Any dips so far this year have led to enthusiastic share-buying, including the slump in July. Therefore, I’ll be watching out to see if the market bounces back above 7,000 points in the short run before taking any actions on my portfolio. As Corporal Jones famously said in Dad’s Army: “Don’t panic!”

Inflation Is Coming: 3 Shares To Try And Hedge Against Rising Prices

Make no mistake… inflation is coming.

Some people are running scared, but there’s one thing we believe we should avoid doing at all costs when inflation hits… and that’s doing nothing.

Money that just sits in the bank can often lose value each and every year. But to savvy savers and investors, where to consider putting their money is the million-dollar question.

That’s why we’ve put together a brand-new special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation…

…because no matter what the economy is doing, a savvy investor will want their money working for them, inflation or not!

Best of all, we’re giving this report away completely FREE today!

Simply click here, enter your email address, and we’ll send it to you right away.

jonathansmith1 and The Motley Fool UK have 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.