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Could another FTSE 100 crash be on the horizon?

Image source: Getty Images.

Between the beginning of August and October 26, the FTSE 100 plunged 837 points to a low of 6,939, slightly above the 52-week low of 6,888 printed at the end of March. 

Over the past week, the index has staged a small rally and is currently trading around 150 points, or 2.2% above the low. 

Some analysts believe that this could be the beginning of a more prolonged rally, but I’m sceptical. Today, I’m going to explain why I think there could be further declines on the cards.

Trade tensions

2018 has been an exciting year to be a stock market investor. Heading into the year, it looked as if markets were on track for another record performance, following on from record-breaking gains in 2017.

However, as the year has progressed, cracks have started to emerge in the global economy. Trump’s trade war with China is sending shockwaves around the world. This uncertainty, coupled with Brexit, Italy’s standoff with the European Union, Saudi Arabia’s meddling in international affairs, growing political and economic change in South America, and the ever-present risk of war in the Middle East, have investors all over the world on edge.

Some City analysts believe we are now heading for a global recession. This view is reflected in the price of oil, which has fallen 20%, and is now in a bear market. A high oil price generally reflects increased demand for the commodity, a side effect of economic growth.

All of these factors do not bode well for the Footsie 100. As more than two-thirds of the index’s profits come from outside the United Kingdom, it’s more of a barometer of global economic health than British prosperity. And some of the index’s largest constituents are highly exposed to some of the critical uncertainties I have listed above. 

For example, HSBC is one of the FTSE 100 largest constituents, and it’s highly exposed to China, and Chinese economic prosperity. Meanwhile, BP and Shell, which account for around 10% of the whole index, are highly exposed to oil price trends, and economic growth around the world.

Difficult to tell

Having said all of the above, in reality, it’s difficult to tell what the FTSE 100 will do going forward. Yes, uncertainty is growing, but at the same time, we don’t know what the future holds for the global economy.

With this being the case, I think the best course of action for investors today is to keep calm and carry on investing. The FTSE 100 might fall, or even rise in the near term, but over the long term, it’s almost certain to produce a positive return for investors. 

Indeed, over the past three decades, the index has returned around 7% per annum, a period that includes one of the worst financial crisis’ on record. 

So overall, another FTSE 100 crash could be on the cards, but I’m not making any significant changes to my portfolio today in anticipation. I’m confident that over the long term, the FTSE 100 will continue to produce positive returns for investors.

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Rupert Hargreaves owns shares in Royal Dutch Shell. The Motley Fool UK has recommended HSBC Holdings. 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.