I woke up this morning to some weakening in my investment portfolio. The gains of the past days have vanished into thin air, in correlation with what is happening in the broader markets. The FTSE 100 index has lost ground over the last couple of days. This follows the sharp rise it saw in the past week, even closing at the highest levels since early 2020. As I write this Tuesday afternoon, the index has barely risen, trading at around 7,335.
Why are the stock markets falling?
There are many reasons why this could be the case. To my mind, this could include both profit-taking. When stocks’ values rises enough, investors could sell some of their holdings at a high, which in turn weakens markets. Some market commentators also ascribe it to the Russian conflict with Ukraine.
But I cannot help but wonder if there is something more fundamental to this situation, even enough to bring on a stock market crash. Even if all the exceptional scientific talent and effort working on ridding us of coronavirus succeeds, macro risks could still keep market uncertain. Just think of inflation. It is at 30-year highs in the UK and at 40-year highs in the US right now. This will most certainly be followed by higher interest rates, the process of which has already begun in the UK. The US Fed is expected to start increasing rates aggressively from March onwards as well, according to leading forecasters like Goldman Sachs.
This in turn will have an adverse impact on all the liquidity that has been flushed into the system since the pandemic started, as money becomes dearer. Note that this is happening in the UK and the US is significant, because both economies house some of the biggest financial markets in the world. Just this monetary tightening could have a pretty sobering impact on stock markets in my view.
What could drag them down further
Maybe not immediately, but higher interest rates could also mean bigger government bills. The government has run-up its debt during the pandemic, interest payments on which will rise now. And all governments have one key source of revenue. You guessed it. Taxes. From last year’s spring budget, we know that in the UK, higher corporate taxes are coming from April 2023 onwards anyway. I reckon that other tax categories could rise too. That would lower our disposable income and could slow growth down, and hence also the stock markets.
What I’d do now
Higher taxes might be good for the overall health of the economy, but for companies and the stock markets in the short term, they are not. Going by what I understand of the government’s temperament so far, however, it is unlikely to spring any unexpected tax shocks to the system that could lead to a market crash. Also, I think the stock markets are likely to price in high inflation and interest rates sooner rather than later. Based on this, I do not think that a stock market crash is coming, but stock market uncertainty might stay. As such, I will keep calm and keep buying my favoured FTSE 100 stocks.
