Last week was an eventful one for both global economic and social news, causing high volatility on stock markets the world over. In the UK, the FTSE 100 index shed almost 4% (with some individual firms within the index losing more than the index itself). So what happened to cause this and what would I do from here?
Key factors
There were two main reasons that saw the FTSE 100 lose ground last week. Firstly, the news of the coronavirus and its rapid spread caused stock markets to lose traction. This tragic event matches with the market reaction to other historical outbreaks, such as SARS several years ago. Why does the market tend to fall on news of these terrible events? Well the index is seen as a barometer of general sentiment, be that from an economic point of view but also from a more general perspective.
The FTSE 100 fell throughout the week as more news coverage came out regarding the virus, but its slide was also exacerbated by the Bank of England meeting on Thursday. Going into the meeting, the futures market was pricing-in about a 50% chance of an interest rate cut (something I wrote about here).
Ultimately, Governor Mark Carney and his committee decided against cutting interest rates, which saw the pound (GBP) rallying on the news. But due to the correlation between GBP and the FTSE 100, this actually caused the stock market to fall. This is because most of those multinational giants within the index are exporters. A stronger pound means these businesses will receive less money back when they convert funds from abroad back into GBP.
What I’m going to do now
What I’m not going to do is panic. Regarding the Bank of England decision, the choice to not cut rates now doesn’t mean rates won’t be cut later on (markets are looking for either a March of June cut). Should we see a cut in either of these meetings, then it’s likely there will be a move higher on the part of the FTSE 100. That would make the latest BoE decision simply a knee-jerk short-term reaction.
When looking at sensitive events such as the coronavirus, it’s impossible to predict how it’s going to pan out. But one thing we can note is that everyone from the World Health Organization to the authorities in many countries are working very hard to contain the virus, and we can all only hope they’re successful. Therefore, I’m not going to worry myself unduly over the slump in the index last week. As a long-term investor, I’m focused on where the market will be in five or 10 years from now, not where it will be at the end of this week.
So while we saw a move lower in the index due to sentiment turning, I certainly won’t be selling out of my portfolio and will be holding on for years to come.Â