This year in the UK, no two events have had a greater impact on stock market indices, including the FTSE 100, than Brexit and Covid -19.
The FTSE 100 has either risen or fallen with almost every new Brexit and Covid-19 development as investors have speculated on what each one could mean for the economy and, most importantly, for their investments.
Let’s dig deeper into this to understand the swings we see in stock markets whenever there is significant news on either Covid-19 or Brexit.
Stock market indices like the FTSE 100 have shown significant sensitivity to Brexit news and headlines ever since the shock 2016 referendum result.
On 24 June 2016, the day that the referendum results were announced, the FTSE 100 fell by 9%. Since then, other Brexit developments have been accompanied by swings in the FTSE 100 and other stock market indices.
For example, on 17 January 2017, when Prime Minister Theresa May announced plans for a potential ‘hard’ Brexit, the FTSE 100 fell by 1.5%. On 20 April 2020, it rose by 0.45% when Brexit talks resumed after a six-week interruption caused by Covid-19.
Most recently, on 15 October 2020, the FTSE 100 fell 1.8%. This was after Boris Johnson expressed disappointment about the progress of Brexit trade deal negotiations during a call with EU leaders. This understandably made investors anxious about the potential for a no-deal Brexit.
A week later, on 23 October, the FTSE 100 rose by 1.3% after talks about the deal resumed.
Investors are fast to react to any incoming Brexit news. Positive news, such as progress towards a trade deal, tends to cause the FTSE 100 to rise.
Any negative news, including the indication of a no-deal Brexit, naturally has the opposite effect, resulting in a sharp drop as investor confidence wanes.
This year, the impact of Covid-19 on the stock market has been even greater than that of Brexit.
When Covid-19 first struck, fears about its impact on the global economy led to significant falls across major stock market indices, including the FTSE 100.
For example, on 12 March, the blue chip index suffered its second biggest one-day crash in history and its largest since 1987 amid concerns over the spread of the virus. It then fell to its lowest value this year on 23 March.
However, the index soon made a tentative recovery. This was after lockdown measures started to calm investors’ concerns about the spread of the virus.
More recently, following indications of a second wave due to rising Covid-19 cases, the FTSE 100 started to fall again. It ended up hitting a six-month low in late October.
But news of two promising vaccines from Pfizer and Moderna have seen the FTSE 100 rally once again. It rose by 4.7%, or 276 points, after Pfizer’s vaccine news. This, in effect, added close to £70bn to this index’s value. The index rose by a further 1.6% after Moderna’s announcement of its own vaccine news.
In a nutshell, positive news about Covid-19 usually translates to a gain in the FTSE 100. A vaccine, for example, signals to investors that normality, particularly in the business world, might resume soon. It suggests that companies’ earnings could go back to pre-pandemic levels and that’s it’s therefore worth investing in them.
Conversely, negative news, like a rise in cases, points to an uncertain economic future causing investors to be extremely cautious.
How can savvy stock market investors take advantage of Brexit and Covid-19 news?
Savvy investors know better than to base their investment strategy on trending news and headlines. There will always be forces like these that cause short-term ups and downs in the stock market.
The best approach is sticking to a long-term investment strategy that’s based on your preferences and capabilities. Over the long term, the market has an upward bias. Those who are patient are often able to garner good returns from their investments.
With that said, negative reactions to Covid-19 and Brexit developments can provide a great opportunity for smart investors to buy stocks and shares at discounted prices.
While it’s up to you to decide whether to pounce on this opportunity, remember the advice of Warren Buffett, one of the world’s greatest investors: “Be fearful when others are greedy and greedy when others are fearful.”
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