This week might have had its ups and downs, but as I write this Friday afternoon, the FTSE 100 index is no worse off than when it started. Of course this does not mean that it is in a good place, yet. But it does reflect that the stock market correction seen last week has not continued. At least for now, it does seem to have stabilised.
The high inflation challenge
But the fact is that all the triggers for the correction are still very much in place. High inflation is really the biggest problem around. At multi-decade highs, price rises are impacting investors’ savings, household incomes, and companies’ profits. We can see this in our everyday living. Just yesterday I paid a significantly higher energy bill, which was expected, of course.
The extra amount spent here would have otherwise gone into investments or some other form of consumer spending. This in turn, would have added to demand for other companies’ goods or services. Instead, it has added to an energy company’s revenues, with what I imagine would be little or no addition to its profits, since it is just passing on increased costs. No one wins in this situation.
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If we multiply this for every consumer in the economy, we are essentially looking at lower demand coupled with sky high prices. A potentially stagflationary situation, which does not bode well. This is particularly so because inflation is expected to remain high. I expect that as companies’ results increasingly reflect the impact of rising inflation, we should see more panicked stock market corrections.
Rising interest rates
With rising inflation, we have also seen rising interest rates. In normal times, this can be quite good for banks, and indeed their stock prices. UK’s banks have long had really low interest rates, and the recent months have seen them finally raise the prices for their loans. But these are hardly normal times. We are looking at rising risks of a full-blown recession, which is defined as six months of contraction in the economy.
Rising interest rates might themselves be contributing to these risks. Debt can be a big fuel for growth. Whether it is households taking on loans to build assets like property or companies raising funds for that next acquisition, the role of credit is vital. And rising interest rates at a time when the economy is already in a challenged place can impact these plans adversely.
This too, could be one of the factors that could contribute to stock market uncertainty. Less growth in companies gives me less reason to put my money in these stocks for capital growth.
What I’d do about the stock market correction
But that is no reason to be despondent. I can still think long term. Even though there are plenty of reasons for a stock market correction to continue or even an outright stock market crash, over time stock investing is more likely to pay off than not. I need to be discerning about which stocks to buy, but if I choose correctly, there is definite likelihood of gains.
