FTSE 100 slumps: Why stock markets are sliding and what it means for investors
The FTSE 100 plummeted today as worldwide markets experienced a sell-off prompted by concerns of a recession in the US that persisted from the weekend.
A sudden drop in the London stock market caused the FTSE 100 to decrease by almost 3 percent, dropping below the 8,000 point. Nervous investors quickly moved their money to safer investments.
At one point, Japan's Nikkei index experienced its largest drop since the 1987 'Black Monday' crash, ending the day with a 12 percent decrease.
Stocks in the United States started the trading day with a sharp drop, with the key S&P 500 index falling 4 percent and the technology-focused Nasdaq decreasing by more than 5 percent.
However, what is the reason for the sudden drop in the stock market and how could it impact your investments? We will clarify.
Market turbulence: Japan's Nikkei index experienced its largest decline in years as stock markets around the world plummet.
Global Stock Markets: What's Going On?
Global stocks are facing uncertainty as indexes experienced significant declines at the beginning of the week when trading started on Monday morning.
The Nikkei in Japan dropped by 12.4%, with the Topix index also falling by 2.48%. This led to circuit breakers being activated, pausing trading on stock markets throughout Asia.
European stock markets are also experiencing a decrease in value. France's CAC index has decreased by 1.9 percent, while Spain's Ibex index has declined by 2.52 percent.
In the afternoon, the UK's FTSE 100 dropped by 2.8 percent to 7,939, while the FTSE 250 fell by 3.8 percent to 20,826. The overall FTSE All Share index was down by 3.03 percent.
The stock market in the United States is experiencing even bigger drops, with the S&P 500 falling by 3.8% to 5,142 and the Nasdaq seeing a 5% decline.
The interest rates on US Treasury bonds are still falling and are now at the lowest level they have been since May 2023. This is due to the fact that the economy is showing signs of weakness, leading investors to anticipate interest rate reductions.
The interest rate on the two-year US Treasury bond, which is strongly affected by expectations of Federal Reserve rate changes, dropped to 3.691 percent. In the previous week, the yield, which moves in the opposite direction of the bond's price, decreased by 53 basis points.
The interest rate on the US 10-year Treasury note dropped by 5 basis points to 3.742 per cent today, following a decline of almost 40 basis points last week.
The self-managed investment platform Robinhood stopped its customers from trading for 24 hours due to higher levels of market volatility.
Overview: The primary markets in the UK showed a decline on Monday morning, with many assets in the red.
What Caused The Global Market Crash?
The decrease in stock prices quickly followed the unsatisfactory US job figures released on Friday. This has led to concerns that instead of a gradual decline, the US economy may experience a sharp downturn, which investors were expecting to avoid.
Job data indicated that more people were unable to find work, while businesses hired fewer workers than anticipated.
During the same period, the Federal Reserve decided not to change rates last week, while other central banks, such as the Bank of England, lowered interest rates.
In a message to investors, analysts at Goldman Sachs raised the likelihood of a recession from 15 to 25 percent.
Investors are concerned about the United States experiencing higher inflation than expected, and the Federal Reserve being less willing to lower interest rates than previously thought. The unexpected signs of a slowdown in the US economy have unnerved markets.
Russ Mould, who is the investment director at AJ Bell, believes that a lot of stock markets have already taken into account the possibility of inflation decreasing and interest rate cuts from the Federal Reserve.
He stated that straying from that course could result in problems such as higher inflation, economic and earnings letdown, or slower rate cuts than anticipated.
Mould stated that earlier this year, the markets were more worried about becoming too heated. He mentioned that people who remember the frantic rate cuts in 2000-02 and 2007-8 will recall that they were unable to prevent a bear market in stocks.
The US stock market is becoming more and more focused on just seven big tech companies that are often referred to as the Magnificent Seven. These companies have seen their stock prices go up a lot because people have very high hopes for artificial intelligence. This has made the market more unstable and unpredictable.
In other parts of the world, the decrease in sales in Asia happened because the Japanese currency, the yen, became stronger compared to the US dollar. This made products more costly and less appealing to foreign investors.
Many of the fluctuations in the market have been driven by the carry trade strategy, in which investors take out loans in currencies with low interest rates to invest in those with higher interest rates.
The yen has been in high demand as a significant source of global funds, making the Bank of Japan's choice to raise rates to 0.25 percent - the highest level since the financial crisis of 2008 - causing fluctuations in the market.
Mould stated that the yen is strengthening because many people who bet against it are now closing their positions, which is causing the currency to rise even more. This is putting pressure on those who placed short bets, creating a cycle that is just as harmful as it was previously beneficial.
How Will This Affect Interest Rates?
Last week, the Bank of England reduced interest rates, but the US Federal Reserve is the main influencer in global markets and has maintained its stance so far.
Central banks change interest rates to manage inflation and boost the economy, and should not let stock market drops affect their decisions. However, the Federal Reserve will be monitoring markets closely.
Goldman Sachs is predicting that interest rates will be lowered in September, November, and December. The reason for this forecast is that they believe there will be an increase in job growth in August, and the Federal Open Market Committee (FOMC) will see a 25 basis point cut as an appropriate response to any potential risks.
If our prediction is incorrect and the August job report is just as disappointing as the July report, then it is probable that there will be a 50 basis point reduction in September.
According to JP Morgan, there is a 50 percent chance of a US recession happening. They also predict that there will be a 0.5 percent interest rate cut in September and another one in November.
What's Going On With UK Markets?
The markets in London have also been affected by the decrease in value, as the FTSE 100 fell from almost reaching a record high last week to dropping below 8,000.
Danni Hewson, the person in charge of financial analysis at AJ Bell, mentioned that the FTSE 250, which is more focused on domestic issues, is feeling the impact of rumors about a possible recession in the US, along with worries about the amount of violence observed in certain UK towns and cities over the weekend.
Terrible sights of hotels engulfed in flames and streets covered in debris are likely to harm customer trust and the amount of people visiting, which are important for shops and restaurants.
‘Next, there are the possible insurance claims that may arise from the harm caused by bricks and Molotov cocktails being thrown.’
The UK economy is currently facing a difficult period with a lack of growth, making this chapter especially unwelcome.
Seeing the whole picture: The FTSE 100's stock price performance in the last 14 years - total earnings have increased because of dividends distributed.
Investor's Next Steps
When the markets start to drop, the best advice for investors is to stay calm. Often, by the time investors realize the market is going down, it is already too late to prevent losses.
Even though markets are nervous, analysts are warning investors to think twice before selling based on the US jobs report.
Sam North, a market expert at eToro, believes that even though the markets did not respond positively to the absence of a rate cut and the current job data, they have been performing well overall and this is likely just a temporary setback.
He stated that it is crucial to focus on overall trends rather than isolated reports. The increase in unemployment can be attributed to temporary layoffs caused by Hurricane Beryl, which is expected to be reversed in the upcoming month. Even in the event of the jobs report indicating larger problems, the Federal Reserve has measures in place to address them.
Strong profit growth is another reason not to worry. The majority of companies in the S&P 500 have reported an annual increase of 11.5%, the highest rate since late 2021. In addition, revenues have continued to increase for 15 consecutive quarters.
A healthy and strong economy is also boosting confidence. The US Gross Domestic Product increased by 2.8 percent in the second quarter, keeping up with the trend of growth over 2 percent in seven out of the last eight quarters.
Many people who invest their money are looking to do so for a few years or longer, so they should expect to encounter challenges along the way. This is why professionals suggest that investors spread out their money in different types of investments, such as stocks, bonds, and keeping some cash on hand.
Even though there was a big drop in the market today, most of the major stock indexes have still made money so far this year. The FTSE 100 has gone up by more than 2 percent, while the S&P 500 and Nasdaq have each increased by over 8 percent.
Strategies For Market Downturns
Sudden drops may concern investors, but market corrections are a normal occurrence. Markets do not always increase steadily, as mentioned by Simon Lambert.
Some of the largest drops in history become less important when you examine stock market charts over a long period of time.
It is crucial for investors to stay calm and not make hasty decisions when the market is volatile. Selling when prices are low can result in missed opportunities for potential gains when the market bounces back.
Here are three suggestions for investors who want to relax and feel less anxious.
Sit on your hands: When market prices drop, it's often wise to refrain from making any hasty decisions. Research has consistently demonstrated that many individual investors struggle to outperform the stock market, largely due to emotional reactions that lead them to sell low and buy high.
Avoid constantly monitoring your investments. It's important to remember that investing is a long-term commitment, so checking stock values every day can lead to problems. If you feel the urge to make changes to your portfolio, resist the temptation to act immediately. Instead, take a moment to step back, talk to someone about your thoughts, or write them down and carefully evaluate whether it's the best decision.
Recognize your feelings: Greed and fear can influence impulsive investment decisions, but it is common to experience them. Understand that your emotions during market fluctuations are normal, but remember that you have the power to choose how you respond.
To have a more restful night as an investor, think about these five factors:
Do not invest all your money in one place. It is important to spread out your investments to reduce risk. It is not wise to have too much in one stock, fund, industry, or market.
2. Take advantage of dividend benefits: One key factor in seeing high returns from investing in the stock market over a long period of time is reinvesting dividends and allowing your wealth to grow gradually.
3. Show courage when others are scared: View market downturns as a chance to purchase investments at discounted prices. Consider it as a buying opportunity in the stock market instead of seeing your investments as losing value.
4. Make sure to save consistently: By investing a set amount each month, you can gradually grow your investment portfolio without being impacted by sudden market downturns that may occur when investing a large lump sum all at once.
5. Keep pushing: Research indicates that the more time you put into investing, the less likely you are to lose money over a certain period. Stay committed and refrain from withdrawing your funds. If you depend on your investments for income, try not to withdraw large amounts when market conditions are unfavorable.
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