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Why did a stock market correction happen in September?

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Screen of price moves in the FTSE 100
Image source: Getty Images.

September was a disappointing month for stock markets. The FTSE 100 index fell by 1% on average from the month before, making it the third month in 2021 that it has shown a decline. But an occasional stock market correction is not particularly concerning, in my view. 

Why is the stock market correction a problem?

However, the frequency is beginning to bother me. This is the second time in three months that the index has fallen. While it made gains in August, the declines during July and September more than wiped them out. As a result, the average FTSE 100 level for September was a tad lower than that in June. 

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And this stock market correction is hardly limited to the FTSE 100 index alone. The FTSE all-share index declined by some 0.8% from August, indicating broadband market weakness. The FTSE 250 index was a small saving grace though. It inched up marginally by 0.1%. This suggests to me that while the overall market mood was weak, UK-centric companies that are represented in the FTSE 250 index, were spared from it. 

What were the causes?

It also suggests that the cause was quite likely a global one. And indeed, there was more than one international factor at work. The biggest of these was the near-collapse of China’s second biggest property developer, Evergrande. The company, which had taken out huge loans, declared itself unable to pay them. While the situation has been managed for now, it did send tremors across markets, since it can have ripple effects across companies. It can also be indicative of underlying weakness in companies’ health as pandemic-driven public spending slows down. 

Besides this, inflation has been a rising concern for some time, and I think also was partly responsible for the market weakness in July. From airlines to packaging providers, companies have mentioned rising costs multiple times in their updates now.

Fuel prices, in particular, can be a cause for concern because they feed into costs for all goods. These have been rising over the past month. And the Bank of America expects crude oil prices to touch $100 per barrel in 2022. 

Rising costs are a challenge at multiple levels. Because of competition, many companies cannot increase prices. As a result, their profits get squeezed. That is bad for both future growth as they have less investible surplus, and for dividends as there is a smaller pie to pay them from. Moreover, when prices rise, consumers’ real income falls, decreasing demand. 

Central banks are prepared to move in to curb price rises, through both a tapering of the quantitative easing seen since the pandemic began and through increased interest rates. The resulting tighter liquidity can slow down stock markets’ rise, which probably spooked investors too.

What happens next?

However, I am not bearish for now. There are plenty of balancing positives around. The pandemic is indeed receding, growth numbers are looking better and companies are posting strong results. These should keep the markets steady, all things considered. The pace of increase maybe lesser, but that can happen purely because of a higher base. I am not just staying invested, I am buying more now, starting with some of these stocks.  

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has 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.

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