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The FTSE 100 has fallen over 1.5% today! Should I buy the dip?

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The FTSE 100 index is down over 100 points today, trading at 7,032 as I write. It’s a volatile day, especially considering that it’s the end of the week and few major company earnings or announcements have been released. The main driver for the sudden slump is due to events in the United States. However, due to the correlation with global stock markets, it’s actually pulling the FTSE 100 index lower with it. 

Why the FTSE 100 is falling today

The main reason for the FTSE 100 slump today is due to comments from a member of the US Federal Reserve. Mr Bullard commented that the US will likely need to adjust monetary policy to achieve its inflation goals. He also commented about risk of inflation moving higher and the need for action. 

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To begin with, this might seem an odd catalyst for a sell-off in the UK stock market. However, I need to think about the chain reaction. The US and the UK are similar in being developed economies. Any action in the US likely will be mirrored here in the UK. So if there is concern about needing to increase interest rates in the US to combat inflation, this is likely to be the same in the UK.

This shouldn’t surprise me, given the fact that inflation figures out earlier this week showed a rise in UK inflation to 2.1% in May. This is higher than the 2% target set by the Bank  of England. So I think investors are assuming potential interest rate hikes sooner rather than later.

Higher interest rates are negative for stocks due to the levels of debt held. Typically, large FTSE 100 companies that exist today hold millions in debt. When this gets refinanced, or when new debt is issued, the interest charged is in line with the base rate. So the higher this rate is, the more expensive it is to service the repayments.

Aside from the comments from Mr Bullard, oil prices are also falling today. This is dragging down companies that either directly or indirectly have exposure to oil.

Should I buy the dip?

Now that I’ve established why the market is falling, I can decide what to do. It’s true that inflation and interest rate concerns are valid. I personally think the Bank of England will raise interest rates next year. However, I don’t think this will be until next summer at the earliest. I also think that it will only be a hike of 0.25% or similar.

The implications for my FTSE 100 stock portfolio in the long term shouldn’t be huge. In this regard, I would look to buy the dip in stocks today. I would be selective, and buy stocks that could benefit from higher rates. As I said here, I’d consider banking stocks. I’d also look at companies with low debt levels. In this way, I should be able to limit the impact (and even turn it into a positive) of future  changes in interest rates.

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Jonathasmith1 does not hold shares in any company mentioned. The Motley Fool UK has no position in any company 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.

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