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Will the FTSE 100 experience a Santa rally?

Photo: Public domain.

Since the US election, the FTSE 100 has occupied a relatively narrow trading range. In fact, the difference between its low and high in the last month has been less than 250 points, which indicates that investor sentiment is relatively subdued. While it may seem likely that this situation will last through to the New Year, the reality is that a significant movement could be just around the corner.

Uncertain times

It seems as though the investment community has yet come to terms with the events ahead in 2017. That’s because if they had, the index would probably be trading significantly lower. The arrival of Donald Trump in the White House is likely to signal a period of higher uncertainty.

The new President may prove to be one of the most disruptive in history. While this could prove to be a good thing in terms of planned higher investment in infrastructure, as well as lower taxation, markets tend to dislike uncertainty. Changing policies bring just that, while Trump’s foreign policy is as yet a known unknown. In any case, he’s likely to adopt a different strategy to his predecessor, which could cause significant uncertainty.

Add to this the dire prospects for the euro following the Italian referendum result and the challenges linked to the UK invoking Article 50 of The Lisbon Treaty and 2017 looks set to be an uncertain year. As such, investors may now start to factor-in these events as the New Year approaches.

Exciting times

However, a Santa rally could still be possible. Thus far, investors have chosen to largely ignore the risks facing the world economy, such as those described above. They’ve preferred to focus on what the events could mean for the long run, rather than the dangers they bring in the short term.

For example, investors could choose to focus on the potentially positive effects of a Trump presidency on inflation. The global economy has faced a decade of deflation, which has caused interest rates to fall. Lower taxes and higher spending in the US could bring the world out of the deflationary cycle and cause interest rates to return to historically normal levels.

Similarly, Brexit could prove to be a good thing for the UK economy. It could encourage a more nimble and high-technology economy to come to the fore, with UK exporters likely to benefit from weak sterling. And while the difficulties faced by the eurozone could lead to higher volatility, many investors may feel that the currency zone has failed from an economic perspective and a replacement may perform better.

Outlook

As such, a Santa rally is on the cards, but so is a significant fall in share prices. At the present time it’s incredibly difficult to call either way as a lot depends on sentiment rather than facts and figures. As such, now could be a good opportunity to prepare to buy high quality stocks at fair prices for the long term. While recent weeks may have been rather subdued, this could prove to be the calm before a clearer direction emerges for the FTSE 100 over the medium term.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.