Last week saw volatility levels inch up in the FTSE 100 index as well as global markets. Yet since the lows seen in March, UK’s main equity index is up over 20%. As we get ready to start August, investors may be wondering if they should take off rose-coloured glasses. A wide range of analysts are also debating whether a second wave of selling may hit equity markets again in the year.
Today, I’ll take a closer look at various risk factors that could challenge the recent optimism in the FTSE 100 shares.
Could FTSE 100 shares crash again?
My short answer would be “Yes, at a future date, FTSE 100 shares are likely to decline again”. Yet I don’t think it would be possible or even prudent to try to give the exact day of such a potential market crash.
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Recent market action seems to be tied to news headlines about economic activity across the world restarting and the number of new Covid-19 cases on a given day. Unfortunately there has been a considerable uptick in the number of cases and hospitalisations, especially in the US, Asia, and Latin America.
Fears of another wave of the pandemic may well mean a prolonged recession worldwide. As the number of Covid-19 cases increases, I’m of the camp that believes a U-shaped recovery in the economy is most likely. Many countries, including the UK, will likely spend a longer time labouring in economic contraction than immediately rebounding. As long as there is no vaccine, a sharp and optimistic V-shaped recovery becomes more unlikely.
Most health experts agree that a vaccine or another form of therapy could potentially take years to develop and fully distribute. As a result, the pandemic may hamper the expected global economic recovery. For example, the trajectory for unemployment in Britain is unclear. According to the recent figures released by the Office of National Statistics, the coronavirus jobs market has not been encouraging.
Therefore, some short-term profit-taking in many FTSE 100 shares may be due. And the current busy earnings season, especially in the US, may put pressure on major indexes worldwide. Broad markets in the US tend to lead others. Thus FTSE 100 shares may also give up some of their recent gains. I believe a decline toward the 6,000-level in the index is possible. Yet such a drop would give investors better entry points to many of their favourite shares.
Brexit transition period is ending
On top of the global agenda, here in the UK, we’re beginning to hear the word ‘Brexit’ again. In about five full months, the Brexit transition period will end. So at the end of the year, deal or no-deal, we’re out of the European Union (EU) completely.
Our government and the EU are currently negotiating a trade deal that could be acceptable to both sides. Yet news headlines don’t show much optimism for an agreement at this point. If the UK leaves the bloc with a deal, FTSE share are likely to take a dive. So it may be prudent to set some cash aside for investing later in the year. It’s likely that investors will be able to buy into good FTSE 100 businesses at prices that offer more value than now.
As always, at The Motley Fool, we encourage market participants to invest for the long-term.
