A month ago I was wondering where the UK stock market might go in September, and I thought we might see the FTSE 100 fall below 7,000 points.
That fear proved correct, with the top index below 6,900 points at the time of writing. Here are three things that I think could send share prices down further in October.
Inflation
Inflation was better than expected in August, at just under 10%. But it could well be set to spike again. Chancellor Kwasi Kwarteng’s tax-cutting mini-budget spooked the financial world, and the resulting negative sentiment sent the pound plunging.
When that happens, imports rise in price, pushing inflation up. And hard-pressed people struggling to pay their bills have even less spare cash.
So tax cuts aimed at benefiting the highest paid, while making things a whole lot harder for those struggling the most, turned out to be unpopular. Who’d have thought?
The Chancellor and Prime Minister have now U-turned in the face of opposition from, well, just about everyone. But when a government acts in apparent carefree opposition to the Bank of England’s aims to control inflation, I worry about what might happen next.
Recession
I rate recession as one of the top UK stock market threats now. But, according to the Office for National Statistics (ONS), economic output rose by 0.2% in the second quarter.
The ONS previously had it falling by 0.1%. And the Bank of England had said it was powerless to prevent a recession.
It’s not for any cheery reason, unfortunately. Apparently Covid had hammered the economy even harder than originally thought, and the gain is relative.
And the difference between a 0.1% fall and a 0.2% rise really doesn’t matter to anyone but statisticians and economists. Such small margins make little difference to everyday life.
The latest figures only take us to June anyway, and the third quarter could be very different. So yes, the spectre of a prolonged recession is still with us.
Liquidity
I’ve been seeing the prospect of dividend cuts as a threat, but the issue is wider than that. It’s all about liquidity.
Some FTSE 100 companies have already cut their dividends. Rio Tinto for example, slashed its interim payment.
Generally, I’m thinking about finance costs. Rising interest rates hit the cost of borrowing for companies. And a number of big firms are still emerging from the pandemic crisis with heavy debt. I’m thinking of companies like Rolls-Royce and International Consolidated Airlines.
Some might have favourable interest arrangements. But sooner or later, interest rates are surely going to hit company cash flow. That in turn could hamper dividend payments. And now savings accounts are paying a bit more in interest, we could see more investors moving away from shares.
Crash?
Whether any of this will lead to a full-on crash is debatable. And I still don’t think we’ll suffer one. But I reckon there’s a strong chance of share prices continuing to decline. What does that mean? It means more cheap shares for investors to buy and tuck away for the long term.