The FTSE 100 is down today. As I write this, the index is down 1.34% or about 100 points. Today’s fall adds to what has already been a volatile week for the FTSE 100. Here’s what I think has rattled stock markets and what it means going forward.
FTSE 100 falling
When I see the FTSE 100 is down, I check what other indexes are doing. Today, across Asia and Europe, from Japan’s Nikkei 225 to the German Dax 30, there is a sea of red. All the major indexes are down today, not just the FTSE 100. So, whatever has knocked the FTSE 100, it is probably not specific to the UK.
The US S&P 500 closed in the green yesterday. That suggests that something happened after the US market closed, and that has spread across the globe with the sun and will drag the S&P 500 down when it opens later today.
The biggest FTSE 100 fallers include Anglo American, Glencore, and Persimmon at the time of writing. That’s two miners and one housebuilder. These are cyclical stocks that respond to changes in the economy. They are also more likely to be called value stocks rather than growth ones. Indeed, if I look at the FTSE Techmark 100 — a growth-orientated index — I can see that it has fallen by 0.8% today, which is quite a bit less than the value-orientated FTSE 100.
Interest rates and stock prices
So, the FTSE 100 is falling along with other major indexes. But, the slump appears to be affecting cyclical and value stocks the most. The prices of growth stocks are faring better. That suggests to me that it is not fears of rising rates that have knocked the FTSE 100 today.
Theoretically, a stock price should equal the value of its future cash flows discounted back to today with an appropriate discount rate. A higher interest rate pushes the discount rate higher. The effect is a lower theoretical stock price. But the impact on growth stocks is more pronounced because their cash flows occur later and are thus discounted more heavily. The opposite is true for value stocks.
Think long term
The US Federal Reserve released the minutes of its June meeting yesterday. Bond yields fell and their prices increased as investors rushed to buy them, and the US dollar firmed. This is a flight to safety response. Although the Fed did bring forward its projected first US rate rise to 2023, there was squabbling over the state of the US economy and if it is strong enough to stop the quantitative easing programme.
What happened in the US yesterday seems to have spread across the world. Investors seem to be looking at the rise of viral variants and the potential for third waves of infection, slowing or even toppling economic growth. They are fleeing stocks (particularly ones sensitive to the economy) and seeking safer harbours.
We have seen fears of a booming economy, inflation, and interest rate rises during this recovery already. Today’s concerns are for a slowing economy. But, tomorrow, I would not be surprised if the FTSE 100 rose instead of falling. The best thing I can do is focus on the long term and ignore the day to day noise. So I won’t be buying or selling anything just on the back of today’s price action.