It wasn’t so very long ago that the FTSE100, the index of the 100 companies trading on the London stock exchange, was at an all-time high.
Boosted by the fall in Sterling after the Brexit vote, the businesses involved were enjoying an apparent bonanza as UK produced goods became bargains in overseas markets.
But the FTSE has fallen dramatically from its highs back in May. What is going on, and should we all be worried about it?
Why the highs?
There are many factors that drive an index like the FTSE up or down.
Sadly, the highs were not driven by the British economy looking brighter (although it may well be), or the world waking up to the great opportunities Britain’s biggest companies represent. Much of the FTSE 100 is made up of international companies. When sterling falls their profits from abroad translate back into record profits when accounting in Pounds.
Britain is also home to many very good and innovative companies, with robust balance sheets and a strength in knowledge and technology. Some analysts suggested that even at the peak of the market these businesses represented good value, especially when investors were looking at dividends, and hence long-term earnings rather than capital growth.
So why the lows?
Now, of course, the FTSE has fallen back, and there may be more than one reason behind it.
Brexit is one of them, although not for the usual threats of doom and gloom. In fact, back in August, the EU’s negotiator Michel Barnier said that the bloc was willing to offer the UK a Brexit deal, unlike that made for any other country. This was enough to cause a rise for the pound, and the FTSE fell accordingly. The UK government was less upbeat, saying they would look into the comments while suggesting that Monsieur Barnier had made similar remarks before – but the impact on the FTSE remained.
But the real reason for the fall seems to be a little further from home – somewhere between Washington and Beijing, in fact.
President Donald Trump seems to be ready to escalate his trade war with China, with a new round of tariffs on $200bn of Chinese goods.
It is an unpopular move in the US. Several tech giants, whose China-based component and assembly operations would be affected warned that another round of tariffs would result in job losses for American workers.
It would be even more unpopular in China, which would be forced to retaliate. This could mean putting the brakes on trade with the US, with the rest of the world getting caught in the traffic.
The fall in the FTSE seems to reflect the fear of this downturn, which can be seen in other indexes around the world.
What should you do?
Stock markets rise and fall as part of their normal operations. There is probably no risk that the world is slipping back into a 1930s style depression triggered by US protectionism. When global stock markets fall investing can be scary. No one likes seeing their capital shrink. But not only is there no need to panic, it is possible to profit from stock market volatility over the long term.
Don’t sell stocks just because the FTSE has fallen. It is still up on where it was a year ago. Don’t stress if some of your holdings are showing a loss. Stocks rise and fall, sometimes very dramatically, and those that look as though they have lost you money today could be the ones that show the greatest recovery tomorrow. Investing is a long-term game.
Perhaps the best single piece of advice to follow when investing is to get some expert support. At Continuum we could be very happy to provide it.
The value of investments can fall as well as rise and you may get back less than you invested.
proactiveinvestors.co.uk – FTSE 100 ends in positive territory as Barnier now sees potential Brexit deal in weeks – 10th September 2018
fool.co.uk – Why the FTSE 100 could still reach 8,000 points by Christmas – 9th September 2018