“The market fell” is a poor description of what happens in a shock. Different assets respond through different channels, and the cause often matters more than the size of the move. Three UK episodes show this.
2016: sterling and the FTSE split
After the EU referendum result in June 2016, sterling fell sharply and UK equities dropped. But the main indices did not move together. The FTSE 250, which holds more companies that earn most of their revenue in the UK, fell much further than the FTSE 100 on the day. The FTSE 100 is dominated by multinational firms that earn much of their income overseas, and a weaker pound makes those earnings worth more in sterling. It recovered its losses within about a week.
The lesson for investors is that an index is a mix of businesses, and the same shock can help one group and hurt another. Knowing where a portfolio’s earnings come from, not just which index it tracks, helps explain its reaction.
2020: a global shock and a fast fall
In February and March 2020 the pandemic produced one of the fastest falls on record, with the FTSE 100 losing roughly a third of its value in weeks as economies shut down. Central banks and governments responded with large-scale support, and markets recovered over the following months, although not evenly across sectors.
This episode is a reminder that volatility is not the same as permanent loss. Investors who sold at the bottom locked in a loss that those who held, or kept investing, did not. It also shows the opposite risk, since some businesses never recovered. The distinction is between a market-wide fall driven by sentiment and a company-specific problem driven by fundamentals.
2022: when the problem was in the plumbing
In late September 2022, a sharp rise in UK government bond yields followed the government’s fiscal announcement. The effect was amplified by liability-driven investment strategies used by pension funds, which had to sell gilts to meet collateral calls, pushing yields higher still. The Bank of England stepped in on 28 September with temporary purchases of long-dated gilts to restore order.
That was volatility of a different kind. It was about leverage, liquidity and forced selling in a part of the market most savers never think about, and it affected mortgage pricing and sterling at the same time. It shows that some shocks start in bond and funding markets and reach households through borrowing costs.
How to read the next shock
Three questions help sort what is happening:
- What is moving? Equities, gilts, sterling, or all at once? A fall in one with calm in the others means something different from a broad move.
- Why? Is the cause a change in expected earnings, in interest rates, or in how markets are functioning?
- Who is exposed? UK-focused firms, multinationals, banks, or leveraged investors?
Equally important is how investors behave. A written plan, such as a target mix of assets, a rule for rebalancing, and a decision about when money will be needed, helps avoid decisions made in the moment. Money needed within a few years sits uncomfortably in assets that can fall by a third. How diversification works explains one way of limiting the impact of a shock that hits a single market.
Markets often react before the data confirms anything, which is why some of the biggest moves seem to arrive without a clear reason. Why markets often move before the data does looks at that pattern.
This is general information, not investment advice. Past market movements do not predict future ones, and investments can fall as well as rise in value.
Sources: Bank of England statements and the Financial Stability Report on the September 2022 gilt market episode; London Stock Exchange Group and FTSE Russell index data; Bank of England commentary on the market conditions of March 2020.
