A stock market correction is coming. Here’s why

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Less than two months ago, the FTSE 100 index crashed to sub-7,000 levels as the Russia-Ukraine war began. This brought it dangerously close to the lowest levels seen in a year. But both the index and the broader stock market in general has shown smart recovery since. The FTSE 100 index even touched its highest levels in a year just a few sessions ago. 

Volatility is the name of the game

As an active stock market watcher and commentator, I see an interesting facet of the current times in this. And that is excess volatility. Investors are very reactive to any developments that could impact their investments. It follows that if there are still risks ahead of us, a significant stock market correction could well happen. 

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Stagflation could lead to a stock markets’ correction

And indeed, serious risks are visible. Perhaps the most glaring one for me as a top-down macro investor is that of stagflation. This is defined as a situation of runaway prices coupled with low or no growth. It is not terribly far-fetched, come to think of it. Supply chain blockages and increased post-lockdown demand have already driven inflation to multi-decade highs not just in the UK but elsewhere as well. 

High inflation is a growth killer. Fuel and electricity bills are already rising significantly. And considering that these are unavoidable costs for business, it follows that they have a second round impact on other prices as well. FTSE 100 companies have been raising red flags on inflation for over a year now. And while so far it has been somewhat manageable, I reckon price rises could really bite now. 

Slow growth and coronavirus fears

While there is no doubt that the UK economy has come a long way since the pandemic, even without high inflation its growth was a bit underwhelming. Now it is likely to be impacted even more. Poor news on the economy or a spate of poor company results could lead to a stock market correction. 

As could a continued drag because of coronavirus. I have to admit that the Chinese coronavirus situation is making me jittery. The country might have a zero-tolerance policy to the virus now, which is leading to fresh lockdowns. But the fact is that it is impacting the economy. And China is the second-biggest economy in the world. This means that when it sneezes, the rest of the world can well get a cold. 

Think of miners, which have benefited hugely in the last couple of years because of massive demand for commodities from China. Even FTSE 100 China-focused stocks like the banking corporation HSBC and the British luxury label Burberry could be impacted by slower economic activity there.

The upside 

At the same time, I think there is plenty of hope as well. Growth forecasts have been reduced, but the economy is still growing. Plenty of companies are hedged against risks related to fuel inflation, which is saying a lot. And for all my ongoing concerns about coronavirus, the fact is that we have come a long way. Just like any bad news can send the stock markets plunging, the absence of it can help them rise to newer heights. I am, as always, investing in stocks right now.