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Why is the stock market falling?

Screen of various price trends, possibly in FTSE 100
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Things have been getting progressively worse for stock markets. The FTSE 100 index is down some 1.4% as I write on Monday morning. The index had already fallen below 7,000 at Friday’s close and has tumbled even lower now. 

Why is this happening? Well, the likelihood of stock market softening has been rising in the recent months. And for a host of reasons. 

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Reasons for the stock market fall

Coronavirus cases have risen in recent weeks in the UK, though the number is thankfully on the decline now. Based on this, there has been speculation of a ‘firebreak lockdown’, though there is no confirmation from the government. 

Recent macro numbers have been discouraging. Growth in the UK in July was at a paltry 0.1% month-on-month, while inflation rose to 3% year-on-year in August. The inflation number is way above the Bank of England’s comfort levels. If this trend continues, we are looking at stagflation, a situation of low or no growth coupled with high inflation. And that may not be an easy situation to contend with. 

Also, the recovery is hinged upon too much policy support. Around the world, policymakers are talking of reducing the extent of stimulus. From real estate to industrial metals, sectors that have gained much over the past year, are now falling fast as a result. 

And then there is the case of Chinese property developer Evergrande. It is the second largest property developer in the country by sales, and a hugely indebted one. Its shares, which are listed in Hong Kong, saw a sharp fall earlier today, sparking speculation of potential contagion across other stock markets. And indeed, the FTSE 100 is hardly the only index to soften today. The meltdown is visible across European stocks. 

Why things can improve

Much as this sounds like a doomsday scenario, it is not. The FTSE 100 index dipped below 7,000 in late July as well, which is less than two months ago. It bounced back soon enough. It is true that September has not been a good month for it so far, with a 1% decline in average index levels from the month before. At the same time, I think that July recovery is worth recalling

As coronavirus cases fall further, the numbers of both hospitalisations and deaths caused by it should begin to look better. This could bring back some investor confidence. Specifically, it could improve the fate of travel stocks, which have been particularly hurt by recent uncertainty. 

Growth numbers for August, at least for the UK, could look much better as they factor in travel during the summer months, and also show a full month’s impact since ‘freedom day’ in the second half of July. Also companies’ results are encouraging so far and I do not see any reason why that would not be reflected in economy numbers as well. 

What I’d do

Even if I am feeling jittery as an investor, the least I will do is stay put. This is not the time to sell, but for the brave, the time to buy. Financially healthy stocks that have fallen fast in the recent days, like industrial metals or those that have risen fast recently, like construction stocks, are good ones for me to buy now.

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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.

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