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3 reasons why the FTSE 100 could fall further

The FTSE 100 has experienced a volatile 2018 thus far. It has risen to a level of 7,877 points, but since reaching an all-time high in May, there has been a sustained fall in its price level. At the present time, it is down by around 10% from its record high. In the near term, it would be unsurprising for there to be further declines, with these three reasons being potential catalysts for continued disappointment for investors.

Trade war

There have already been tariffs placed on imports by the US, China and a number of other countries around the world. What started as a relatively small-scale action now seems to have the potential to turn into a full-scale trade war. While it is unlikely that any politician wants such an event to take place, it could happen surprisingly easily. Retaliatory tariffs could mean that there is a gradual ramp-up in protectionism over the coming months.

Clearly, tariffs are likely to be bad news for global GDP growth. History shows that free trade can encourage stronger GDP growth, which ultimately drives the stock market. As such, if further tariffs are brought in by any major world economy, it could lead to a worsening of investor sentiment.

Interest rates

Of course, the US economy is continuing to grow at a rapid rate despite the potential for a full-scale trade war. It is expected to post growth of around 3% in the current year, and this could prompt the Federal Reserve to become increasingly hawkish regarding interest rates.

Although inflation may remain relatively low, the fear of price rises could cause rate-setters to adopt an increasingly cautious stance regarding monetary policy. They may seek to curb a potential rise in inflation before it becomes an issue for the economy. That’s especially the case since the US has cut taxes and increased spending.

A rise in interest rates could lead to a slowdown for the US and world economies. It may also lead to debt servicing issues for businesses and consumers in the US, as well as across the world. As such, even if the economy is growing rapidly, investor sentiment may weaken in future.

Brexit

Thus far, Brexit seems to have been positive for the FTSE 100. It has contributed to a weakening of sterling that has provided a positive currency translation for a number of the index’s constituents. As such, a Brexit deal which causes an improvement in investor sentiment towards the UK may lead to a stronger pound and downward pressure on international stocks which mostly operate abroad.

Clearly, a Brexit deal could be good news for UK-focused shares. But with three-quarters of earnings within the FTSE 100 being derived from outside of the UK, its overall impact on the FTSE 100 may be negative in the short run.

Takeaway

The FTSE 100 may have endured a difficult number of months. However, further falls could be ahead in the short run. As ever, this scenario could create buying opportunities, with high-quality stocks potentially being available at larger discounts to their intrinsic values.

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Peter Stephens 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.