Don’t put me down as a doom-monger, but I’m someone who keeps an open mind about the direction of the market. A stock market crash isn’t a scenario any of us want to see. Yet simply blocking out the thought of one isn’t a smart decision. Rather, it’s important for investors to note the red flags in the market, to then make informed choices.
Catching a cold from neighbours
Data from Europe over the past couple of weeks has turned sharply negative. This is leading to some economists expecting a recession in the eurozone. For example, the composite Purchasing Managers’ Index (PMI) data fell to the lowest level since late 2020. This is a good gauge of business activity and sentiment.
Given the amount of trade that exists between Europe and the UK, this could spark a negative reaction in stocks as investors think about the consequences. This would include lower demand from consumers to import products from the UK, as well as higher prices charged to UK firms as businesses in Europe try to maintain revenue.
Looking at the charts
Even though I don’t base my entire investment strategy on just charts, they’re certainly is a factor to consider. This week, the FTSE 100 has nosedived 350 points from a week ago. At 7,350 points, the next area of support is in the 7,200-7,250 point region. This is the level that has been visited three times this year. Each time, value buyers stepped in, preventing the index from falling further.
It looks to me like we’ll reach 7,200-7,250 points again within the next week. This would be the fourth time, and if the selling continues, it could open the trapdoor for a much larger fall. This could panic investors, causing a larger chain reaction.
Wobbly labour market
A good indicator of the health of an economy is the labour market. In the UK, fresh data showed that employment dropped by 82,000 jobs in the three months up to August. This marks the worst stretch of job losses since 2021. And this doesn’t even reflect the job losses from August to October. From the corporate updates and news headlines even in the past few weeks, more firms are cutting jobs.
Not only does this signal bad news for the economy, but also suggests a possible market crash. If investors get scared that businesses are really starting to struggle, the reaction could be to dump stocks as a result.
Not panicking
Despite the three valid factors mentioned, it’s not all doom and gloom. It appears that interest rates have peaked, meaning that there shouldn’t be any more pain caused from this area. Further, we’re halfway through the current earnings season and so far there have been some strong performances from FTSE 100 companies. The Shell share price hit an all-time high last week.
So I think it’s key to be selective in where to invest right now, to be ready for whatever the market might throw our way in coming months.
