The FTSE 100 continues to move lower on Friday after the dips from earlier this week. Most UK stocks in the index are in the red. Chatter over the weekend will no doubt be just about another healthy correction for the market. Or could this compound into a crash this summer? Here are some warning signs I’ve spotted.
Poor housing data
Halifax released data on Friday that showed house prices are falling at the fastest annual pace since 2011. Higher borrowing costs mean that the average price of a home fell by 2.6% year-on-year. Month-on-month, the prices have declined for the past quarter.
This isn’t positive for the market sentiment overall. If this data continues to disappoint, it could cause a spiral lower. It would naturally drag down the prices of homebuilder stocks, but then could spill over into the banking sector due to mortgage implications for defaults.
If the Bank of England continue to raise interest rates, pressure on the housing market is only going to get worse. This is an area investors need to keep a close eye on.
6.5% could be on the table
Fresh interest rate expectations sit at an eye-watering 6.5% from some traders in the news this week. From the current level of 5%, this projection is for rates to peak in Q1 next year at 6.5%.
It seems that expectations are constantly climbing higher and higher as the central bank continue to struggle to get inflation down.
The projection is a real warning sign for UK stocks that potentially could trigger a further fall in coming weeks. At such a high level, it makes it very expensive for businesses to raise new debt or borrowings.
Further, the benchmark return for investors is much higher. If someone could get an interest rate of 6.5% next year, they need to be confident in making at least that return from buying a stock to make it worthwhile. If not, then why take on the risk?
Earnings season wobbles
Finally, the upcoming financial reports from firms could dictate further volatility. There’s sentiment that we could see some disappointing results, given the lacklustre economic performance in Q1.
Granted, some sectors could be immune, as well as companies that generate earnings outside of the UK. But I feel investors will be cautious as expectations are already quite high, so any misses could see a sharp share price fall.
For long-term investors, there shouldn’t be too much panic overall. If anything, a sharp decline in the FTSE 100 over the coming months will provide a great opportunity to buy value stocks cheaply. With the worst of the pandemic impact is behind us, I believe the next turn of the economic cycle will provide us with growth.
Having this bigger picture can help us all make more informed investment decisions.
