A couple of months ago, my colleague Alan Oscroft picked up the baton of assessing whether the FTSE 100 index could pass the mythical 8,000 point mark by Christmas this year.
As of market close last Friday, the index was at 7,359, needing around 8.7% in two months to reach the mark. While this may look like a little bit of a stretch to achieve before this year is out, I firmly believe that 8,000 points is a very realistic mark for early next year, enabling the index to hit further highs as 2020 pans out. How so?
Politics
Over the next few months we have both a general election and another Brexit deadline. Both are what we call ‘risk events’, in that the market could be thrown in a sudden direction depending on the outcome. Now while this is impossible to say for certain, let us look at one such path.
If the Conservatives win the general election (as current polls suggest), then there is not the general uncertainty of a change of government. Indeed, the FTSE 100 should take this in a positive light.
Added to this is that, with a higher number of seats (and even potentially a majority), the Conservatives should find it easier to vote through the current Brexit bill, enabling the UK to leave the European Union before the next deadline with a smooth transition. Again, this would provide a boost to the index, although some of this will be lost due to the correlation between the British Pound and equity markets. You can read more about that here.
Economics
Last week saw the latest Bank of England meeting. Mark Carney and his colleagues in the Monetary Policy Committee decided against raising interest rates. What was surprising was that two members (Haskel and Saunders) actually voted for a 0.25% rate cut.
Usually, with big political events coming up, central bankers like to keep their powder dry in that they want to see what happens before deploying different tactics to counterbalance it. Thus, last week shows that the Bank of England has a bias towards cutting rates over hiking them as we currently stand. This will be positive for FTSE 100 constituents, as firms are able to borrow at relatively cheap interest rates for at least the next few months.
Inflation here in the UK has also been stable at around 2% over the summer. As the effects of inflation can sometimes take a few months to filter through, this should see a boost to FTSE 100 companies into early next year.
Low and stable inflation enables businesses to accurately plan for investments and other spending as it they are confident that their costs will not change wildly in the future due to inflation. As investors see them committing to a longer-term plan, this could boost their confidence in investing in the company.
Overall, while we may not see 8,000 points by Christmas, there is a strong possibility of seeing it reached and surpassed in 2020.
