At the open this morning, the FTSE 100 slid down to 7,872 points. Despite opening the week above 7,900 points, there have been several factors in the short term that have not only prevented the stock market from rallying, but have acted to push it lower. Here are the main reasons that investors need to be aware of.
UK inflation still far too high
Early yesterday morning, the inflation print for March was released. At 10.1%, it was lower than the previous month of 10.4%. However, it’s still significantly higher than some other developed nations. For example, in the US the latest inflation figure from last week was 5%.
This inflation report saw the FTSE 100 drop quickly after it was released. The concern investors have is that we’re getting into a situation whereby inflationary pressures simply aren’t going away. This translates to higher raw material costs, higher labour costs, higher transportation fees and more. If companies can’t grow revenue, these higher costs mean less profit.
Lower profitability usually correlates to a lower share price for a stock as investors re-adjust expectations.
Interest rate expectations rising
Another cause for concern this week has been the heightened chance of more interest hikes from the Bank of England. At the next May meeting, City analysts are calling for a 0.25% increase. This would take the base rate to 4.50%. Yet with the higher inflation number from Wednesday, people are now expecting more increases from the central bank later this summer.
This is logical, as the key tool that the central bank have for lowering inflation is to raise interest rates. Some are estimating a peak rate of 5% by the autumn.
The change in this thinking is damaging for the stock market. Higher rates make it more expensive for companies to raise finance and restructure existing debt. A shift from 4.25% to 5% might not sound like a lot, but this difference on hundreds of millions of pounds of debt really does add up.
Miners weighing the index down
Finally, I note the underperformance in the mining sector today due to pressure on commodity prices. Some of the biggest losers so far today include Antofagasta, Rio Tinto and Anglo American.
The FTSE 100 is a ‘market cap’-weighted index. This means that each of the constituents doesn’t have an equal influence on the index price. Rather, the larger the market cap of the firm, the bigger the allocation it has to the price movements.
The three commodity stocks mentioned are some of the largest in the FTSE 100. Therefore, the fact that they are in the red today acts to drag the overall market lower.
What to do from here
It’s very important for investors to understand why short-term swings are happening. However, I try not to panic when I see spikes or drops during the course of the day or a week. For long-term investors, the focus is on finding stocks that can outperform in years to come, not just for tomorrow.
