Since reaching an all-time high of around 7050 points in recent weeks, the FTSE 100 has shed 200 points to trade as low as 6850 this week. That’s a considerable fall in a short space of time and shows that investor sentiment can be extremely fickle. In fact, one day there were celebrations that the FTSE 100 had finally pushed above and beyond 7,000 points for the first time, and just one week later commentators are discussing whether 6,500 points is next up for the UK’s major index.
Realistically, though, is the FTSE 100 really on a downward spiral? Or, is now the perfect buying opportunity?
Perspective
Clearly, a drop of 200 points in a week is of concern for short-term investors, but for long-term investors it is nothing to be particularly worried about. After all, the macroeconomic outlook for the UK and for the global economy still appears to be relatively bright. Certainly, there are challenges in the Eurozone, Ukraine and in the Middle East, but they have been with us for some time and did not prevent the FTSE 100 from pushing through 7,000 points this month.
Volatility
Of course, the 200 point drop is likely to be the start of a period of higher volatility than we have seen in recent months. A key reason for this is the UK General Election, with the official start of the campaign having officially begun. And, with a hung parliament being a likely outcome, looking back to 2010 could be of benefit to investors.
Back then, the FTSE 100 was relatively volatile as the Conservative and Liberal Democrat parties engaged in what proved to be a fairly orderly coalition government. As such, investors should expect at least as much volatility as in May 2010, but with the added ingredient of greater uncertainty this time around. That’s because there is a realistic chance of a minority government being in place in 38 days’ time, which could lead to increased uncertainty and even a second election later in the year.
Long Term Prospects
While buying shares during uncertain periods does not feel natural to most investors, history tells us that it is the best time to do so. That’s because to ‘buy low and sell high’ there must be a clear reason for shares to be low or high. And, while we would all like to find the bottom of the market and pile in all of our available cash at that point, finding the lowest ebb of a very volatile market is nigh on impossible.
So, while an increasingly volatile FTSE 100 is likely to be of concern for short term traders, for long term investors it may prove to be an opportunity to buy high quality companies at even lower prices. Certainly, the FTSE 100 may not have yet reached its low point for 2015 and shedding 200 points in a week may well be repeated during the next couple of months. However, for those of us who are looking many years ahead, such moments provide opportunity rather than concern, with the FTSE 100’s future still being exceptionally bright even if there is a degree of political turmoil in the meantime.