The FTSE 100 is up over 1% so far in trading today (10 October). Despite this, there’s a lot of uncertainty in the market right now. Between now and the end of the year here are several factors that could be key in determining if we get a crash instead of a Santa rally. Let’s review the key ones now.
Wars
It’s a really sad state of affairs that not only is the war in Ukraine ongoing, but now we have war in Israel. The situation is still very fluid, but it’s clear that military conflict around the world has gone up a gear in 2023.
For the moment investors haven’t panicked when digesting the news headlines. Yet if things escalate further, this could be a real catalyst for a market crash. For example, if Russia decides to take on NATO or if Iran gets involved in the Israeli conflict.
I’m not an expert (or someone who wants to stir the pot) on these events. But it’s definitely something investors need to keep an eye on.
Sticky inflation
Earlier this year many were silently fist pumping the good news that inflation was falling. Yet the August reading of 6.7% was very similar to the 6.8% of the prior month. There’s concern that inflation might not fall in Q4, and could remain elevated.
When we add into the mix the fact that we don’t really have any GDP growth to speak about, it’s the textbook definition of stagflation.
For the moment I don’t believe investors think the UK economy is in a really dangerous place. Yet if we have a couple of high inflation releases in the coming months, it could spark a market crash.
Monetary policy
The Bank of England’s monetary policy committee is in charge of setting interest rates. Last month it decided not to raise the base rate from 5.25%. However, not many believe that we’re quite at the end of the road for rate hikes.
Between now and the end of the year, there could be a negative surprise with higher-than-expected rate increases. Given how high we are already, it could be the tipping point that causes the market to crash.
Putting it all together
I think the biggest factor that could cause a crash before Christmas would be a global escalation in wars. However, I can’t say for sure if this will happen. This is the nature of any sharp drop, in that it comes as a surprise.
I think that high inflation and further interest rate rises could prevent the FTSE 100 from rallying to fresh highs. But the risk of either causing a full-on meltdown is low.
To prepare myself for any potential for a move lower, I’m looking to buy defensive stocks for my portfolio. For example, this would include stocks from the utilities sector. Even if we see significant economic disruption, I’d expect demand to stay firm for water, gas and electric operators. In this way, I could even outperform the broader index. This shows that even during a period of uncertainty, I can still look to be ahead of the market.
