The FTSE 100 crashed 3% today, as investors were spooked by the prospect of a new Covid-19 variant. This new variant — of which there has been 100 confirmed cases in South Africa, Hong Kong and Botswana — is said to have an “unusually large number of mutations”. Consequently, it is provoking “huge international concern” and many countries, including the UK, have already banned travel to a number of African countries. All of this seems extremely worrying, and there is the chance that it could undo the strong economic recovery from the past year. So, is this 3% drop just the start of a stock market crash?
Impacts of the new variant
So far, the exact details of the variant are fairly unknown. However, due to the extremely large number of mutations, it may be more transmissible and evade the body’s immune response. This may also mean that the vaccine is far less effective against the new variant. At worst, this could lead to another lockdown, a factor that could trigger another stock market crash.
The new variant has also had an extremely bad reaction in several different industries. For example, oil prices have dived more than 5%, hitting their two-month low. This has seen the oil majors BP and Shell suffer considerably. The travel industry has also suffered, due to the prospect of international travel being further curtailed. This has seen the easyJet share price fall 10% and the IAG share price fall over 14%.
Is a large stock market crash the next step?
With the FTSE 100 down 3% in early trade, there is a fear that things could get much worse. Indeed, it is still over 7,000 points and up around 12% over the past year. However, if the new variant is as serious as it sounds, there is a compelling case that many FTSE 100 shares will lose these recovery gains. This could culminate in a stock market crash of a similar magnitude to last year. Factors such as rampant inflation and the already slowing economic recovery could help trigger such an event.
Nonetheless, there are also reasons why the FTSE 100 could easily rebound from this 3% drop. For one, the new variant has not yet been found in the UK, and if the containment measures work, it is unlikely to have a significant impact on UK companies. Further, if the vaccine remains effective against the new variant, this could prompt a quick recovery in the Footsie.
What am I doing?
Right now, I’m just surveying the situation, but I’m not selling anything yet. Instead, I may use the dip as an opportunity to buy shares on the cheap, provided they are robust enough to cope with more economic turmoil. If the FTSE 100 falls further, this is my likely action. While the prospect of a stock market crash does seem very real, I also believe it will not be of the same magnitude as last year. This is because the vaccine rollout seems strong and there is hope that this new variant can be contained.
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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