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Why the FTSE 100 index is crashing today

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The FTSE 100 is having a bad day today. As I write this, shortly after lunch, the index is down about 2.7%. That’s a significant fall. Many Footsie stocks are down much more than this. 

Here, I’m going to look at why the FTSE 100 index is down today. I’ll also explain what I think will happen next and what I’m going to do now.

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Why is the FTSE 100 down today?

The main reason the FTSE 100 is down today is that investors are concerned about inflation (rising prices of goods and services). Since the beginning of the Covid-19 pandemic, the world’s central banks have pumped unprecedented amounts of money into the global financial system. In the US, for example, President Joe Biden recently passed a $1.9trn stimulus package. With all this money sloshing around the system, inflation is now rising.

With inflation rising, the US Federal Reserve (the Fed) – the most influential central bank in the world – is likely to increase interest rates at some stage in the not-too-distant future to slow things down. This is spooking stock market investors. That’s because when interest rates rise, company profits can take a hit (interest payments on debt are higher) pushing share prices down. Higher interest rates also make stocks less attractive relative to other assets such as cash savings products.

Interest rate uncertainty

I suspect that the main reason the FTSE 100 and other stock indexes are taking such a hit right now is actually the uncertainty over the timing of a rise in interest rates.

Realistically, a small increase in interest rates would not be a bad thing. Right now, interest rates are at emergency-level lows. If rates were to rise, it would show that the global economy is back on track. That would almost certainly be a good thing.

I think the reason stocks are falling is that the Fed is refusing to provide any guidance as to when it will lift interest rates or taper its stimulus. Investors hate this kind of uncertainty. If the Fed came out and said that it is going to lift interest rates tomorrow, I suspect stocks might continue rising.

What I’m doing now

As for the moves I am going to make now, I’m going to do what I always do when stocks are volatile. I’m going to a) stay calm and b) look for attractive buying opportunities.

Staying calm is the most important thing to do when stocks are falling. If you panic, you can make irrational decisions that you regret later on.

In terms of buying opportunities, right now I am seeing quite a few in the FTSE 100. Some stocks that look attractive to me at present include property website group Rightmove, athletic footwear retailer JD Sports Fashion, financial services group London Stock Exchange, consumer goods powerhouse Reckitt, and medical device specialist Smith & Nephew. All of these Footsie stocks could fall further in the short term, of course. However, in the long run, I believe they will be good investments for my portfolio.

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Edward Sheldon owns shares in Rightmove, JD Sports Fashion, London Stock Exchange, Reckitt, and Smith & Nephew. The Motley Fool UK has recommended Rightmove and Smith & Nephew. 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.

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