Over the last six months, the FTSE 100 index has been making a steady recovery from the impact of the pandemic. Despite increasing by nearly 25% since last November, the index is still below its pre-pandemic levels.

Today, the index, along with several others, such as the S&P 500, took a big hit. To be specific, the FTSE 100 is down 2.5%. That may not seems like much, but for a large index, that’s a high level of volatility for one day. The S&P 500 has also seen its value drop by around 1%. So what’s going on?

What’s going on with the FTSE 100?

There are many factors influencing the value of the FTSE 100 index. However, as far as I can tell, the poor performance is originating from the uncertainty surrounding inflation. Many governments around the world have begun issuing stimulus packages to reboot their economies. 

Here in the UK, the government’s summer stimulus is estimated to be around £20bn ($28.3bn). Meanwhile, China has injected $500bn. And just recently, US President Joe Biden has just approved a $1.9tr stimulus package. 

These additional funds may help gets people back to work and the wheels of business turning again. But as a consequence, with so much cash floating around, the value of money has consequently suffered.

To counter this problem, the US Treasury Secretary, Janet Yellen, made a speech that indicated a moderate increase in interest rates is likely to occur. Given the direction in which the FTSE 100 is currently headed, I think it’s fair to say investors aren’t too pleased about the idea.

What rising interest rates mean for the stock market

Rising interest rates can be bad news for stocks, so seeing the FTSE 100 and other indices drop is not that surprising to me. But they are good at preventing inflation from getting too high. Why are interest rates such a concern for equity investors?

When interest rates go up, the cost of debt for a business also increases. In other words, the amount of interest a business pays on its loans is higher. And subsequently, its profits are negatively affected. This is why companies with high debt levels are currently seeing their stock prices get hit the most. But at the same time, increased interest rates make alternative investment instruments such as bonds more attractive. And so, part of the sell-off is likely money being shifted from one asset class to another.

I actually think the rising interest rates are a good sign. While it’s not fun seeing the stock market decline, the ability to increase rates is a strong indicator that the general economy is doing well. 

Closing thoughts

At the moment, rates are at record low levels of 0.25%. It is currently unknown as to when interest rates will rise or by how much. This, no doubt, is adding to the level of uncertainty.

But as a long-term investor, I’m not concerned. Between 2015 and 2019, interest rates rose from 0.5% to 2.5%, and the FTSE 100 still climbed more than 11%. Meanwhile, over the same time period, the S&P500 soared by more than 60%.

Personally, I think the falling share prices are an excellent opportunity for me to buy more shares at a discount for my portfolio.