There is an old saying that ‘markets ride the escalator up and take the elevator down’ and the FTSE 100 may be about to put that to the test, especially if Monday’s sharp losses are not quickly erased.
Falls in cryptocurrencies, meme stocks, richly-valued momentum favourites and the marked underperformance of emerging markets have all been hinting at a decrease in risk appetite and now the core, headline indices are starting to wobble. Investors must now decide whether this is a chance to buy on the dips or the first sign that there is trouble ahead.
“Stumbles in previously red-hot areas are a concern and a hint that at the very least that more volatility may be around the corner. After an understandably wild 2020, which began with the pandemic’s spread and closed with the jubilation prompted by ‘Pfizer Monday’, 2021 was very quiet, with just 40 daily moves of more than 1% in the FTSE 100 from open to close, compared to 116 the year before,” says AJ Bell Investment Director Russ Mould.
“Vaccinations, an end to lockdowns (albeit to varying degrees from country to country), an economic upturn and ongoing monetary and fiscal support from central banks and governments all provided markets with succour and helped restore some calm.
“But impoverished governments are now turning off the fiscal taps and looking for ways to raise money and try to restore their tattered finances, while central banks are inching away from ultra-loose monetary policy and even thinking of tightening it.
“In 2021, there were 113 individual interest rate rises from central banks against just 13 decreases, according to www.cbrates.com, and the score is already 11-1 in favour of hikes relative to cuts in 2022. The Bank of England put through a tentative increase in December and is expected to follow through again in February while markets now think the US Federal Reserve could take interest rates to 1.25% from 0.25% this year and even start to reduce Quantitative Easing.
“This may be markets’ biggest concern, even allowing for the prospect of geopolitical tensions between Russia and NATO and the US over Ukraine. A tidal wave of cheap liquidity has buoyed markets and, whenever there has been trouble, provided them with a comfort blanket. Less loose, or even tighter, monetary policy, may take that blanket away.
“It may be no coincidence that the more liquidity central banks have provided, via zero interest rate policies (ZIRP) and Quantitative Easing (QE), the more somnolent equity markets have become, at least if the FTSE 100 is any guide.
“Since 1995 there have been, on average, 83 daily moves of more than 1% in the UK’s headline index, but that average figure drops to 80 over the past twenty years, 57 over the last ten and 54 over the last five – and that is despite the pandemic-inspired panic of 2020.”