In early 2020, the FTSE 100 dropped by over 2,000 points as investors started to take the pandemic seriously. Yet despite Covid-19 being far from over, the share index is now almost back to pre-pandemic levels. So is the stock market in a bubble? And if you have investments, should you be worried? Let’s take a closer look.
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How has the stock market performed since the pandemic?
Since March 2020, the performance of the stock market has been remarkable.
At the beginning of 2020, the FTSE 100 share index sat at 7,600 points. Yet when coronavirus started to dominate news headlines, investors started to worry. Because of this, the index fell dramatically from 7,400 points to 5,190 points between late February and mid-March.
However, by May 2020, the FTSE 100 had recovered slightly, climbing above 6,000 points. In June 2020, it rose even further, surpassing 6,500 points.
Yet, by late October the tide had started to turn again, and the stock market tumbled to 5,000 points. This was partially fuelled by fears of emerging Covid-19 variants.
By the close of 2020, the FTSE 100 recovered to 6,400 points and by April 2021, it surpassed the 7,000 mark for the first time in over a year. Since then, the stock market has remained more or less at this level.
Is the stock market in a bubble?
While the stock market has performed strongly during the pandemic, many investors have expressed concern that it is in bubble territory. Let’s explore five key reasons why.
1. Possible job losses
Fears of widespread job losses did not materialise immediately after the pandemic struck.
That’s because the government implemented a job retention scheme, with the state paying the wages of millions of workers.
While the scheme has undoubtedly saved some jobs, it doesn’t officially end until 30 September. As a result, fear remains that a number of companies may let workers go as soon as the deadline passes. If this happens on a large scale, it could have a big impact on the wider economy, including the stock market.
2. Lack of UK trade deals
Many companies in the stock market rely on free trade deals in order to cut the cost of business.
Yet while the UK has signed a limited number of trade deals since leaving the EU, many countries, including the USA, do not appear overly eager to give the UK favourable terms.
3. Interest rate rises on the horizon
Inflation in the UK is now at 3.2% – well above the government’s annual inflation target of 2%.
Put simply, this places pressure on the Bank of England to raise its base rate to tackle rising inflation. Doing this would make lending more expensive, including many mortgages.
Should this happen, then many businesses may struggle too, especially those with large debts to service. Such an impact on businesses could negatively impact the stock market.
4. The possible collapse of Evergrande
Evergrande is one of China’s largest property developers.
Yet fears are growing of its impending collapse, which has the potential to impact the UK stock market. That’s because a number of banks have exposure to Chinese markets.
5. Bank of England polices
Some analysts believe that the stock market is in one large bubble alongside other asset classes such as housing.
That’s because many point to the Bank of England’s extensive quantitative easing programme as the cause for the big rise in asset prices over the past year. Quantitative easing is where the Bank of England buys government and corporate bonds.
To date, the Bank has purchased £895 billion worth of bonds, and many suggest that this money has simply landed in the hands of asset holders, including those invested in the stock market.
Those who support this theory will therefore expect a correction in prices at some point.
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Can the stock market continue to surge?
While it’s important to take the above factors into account, it’s also important to note that the stock market is notoriously difficult to predict. Furthermore, many analysts expect the FTSE 100 to continue to surge well into 2022.
That’s because some optimists believe that the UK’s economic recovery from Covid-19 will be better than expected. Others believe that when the pandemic is fully behind us, consumer spending will surge, boosting businesses.
What can I do to protect my investments?
Whether or not you take the view that the stock market is in a bubble, it’s a good idea to choose a share dealing account with low fees, so you can invest at the lowest possible cost.
It’s also a wise move to ensure you diversify your investments. This ensures that you do not take on more risk than you are comfortable with.
To learn more about investing, take the time to read our guide on the Investing Basics.
