Investing isn’t always plain sailing. For many new investors, a market crash is something they haven’t experienced before, myself included. So when my portfolio dropped last week – by almost 10% – it was a shock.
It can be easy to panic in these situations. Understanding why the stock market falls can help make a portfolio drop less scary.
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Why the financial markets went red
There are a number of reasons the financial markets dropped last week, including concerns about a conflict in Ukraine, worries about inflation and Covid-19 fears still looming over financial markets.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, explained: “The threat of conflict breaking out on the doorstep is hanging over European indices, as hopes begin to fade that there will be fresh meaningful moves from diplomats.”
Meanwhile, rising inflation has had a significant impact, particularly on tech stocks. As speculation increases about inflation being here to stay, investors are starting to worry about central banks taking a more aggressive stance. This has led to market falls.
High inflation affects a company’s valuation because it can cause expenses to rise while reducing pricing power.
How individual stocks are performing
While the markets fell overall, individual stocks all performed differently. When trading stocks and shares, it can be useful to keep an eye on how individual companies perform.
Some stocks – like Barratt Developments in the FTSE 100 – have experienced significant falls, as investors fret about the impact of an expected further rise in interest rates on long-term demand.
Streeter explained: “Just like tech exuberance in the era of cheap and easy money, it’s feared the red hot market will cool dramatically when mortgage payments start increasing and the cost of living squeeze intensifies.”
Meanwhile, tech-centric companies continue to suffer. Streeter warns that companies that “launched onto the market with prospectuses full of promise over the last 18 months are now seeing confidence in their business models fading fast, as the era of cheap money hurtles to a close”.
There is some good news…
It’s not all bad news for those investing. Some companies are currently performing better than others.
Vodafone is performing well as speculation about its future has increased interest in the company. A potential merger could be on the cards with Three UK, and there are also talks continuing with rival Iliad to merge business in Italy.
“The deals would potentially create a telecoms powerhouse and give Vodafone much more clout across mobile and broadband operations. It would also layer up Vodafone with armour to fend off private equity bidders thought to be circling,” Streeter explains.
Unilever is also performing better than last week. Investors reacted poorly to its proposal to buy GSK’s consumer division. The company’s decision to walk away from the deal and not offer over £50 billion was welcomed by investors.
What’s next for the financial markets?
Sadly, none of the issues have been resolved, and there’s still a lot of uncertainty hanging over the financial markets.
Without a crystal ball, it’s impossible to tell what will happen next. However, it seems unlikely the turbulent times are behind us just yet.
The IMF has warned that tighter monetary policy from the Federal Reserve (the US central bank) might strengthen the dollar and weaken developing nations, who are still recovering from Covid-19. This is raising concerns that the global economic recovery may not be as strong as first thought.
Meanwhile, in China, there are still lockdowns due to the country’s zero-tolerance policy on Covid-19. This could well have an impact on the markets and put further pressure on supply chains.
Finally, geopolitical tensions surrounding Russia and Ukraine are still high and will likely continue to cause uncertainty in the markets until they are resolved.
This doesn’t mean you should be put off investing. If you want to start investing, and potentially take advantage of lower market valuations, setting up a stocks and shares ISA could be a good starting point.