Here’s why I think the FTSE 100 could smash through 7,000 in December

The FTSE 100 (INDEXFTSE:UK) enjoyed a stellar November. Paul Summers speculates on the chances of a Santa Rally to round off 2020.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As we get ready to say goodbye to a tumultuous 2020, the FTSE 100 has a spring in its step. Sure, it’s been up and down over the last few days, but the general direction is most certainly up. The UK stock market’s top tier closed at 6,368 yesterday — 14% higher than where it stood just one month ago. 

Could we get past 7,000 next month? History suggests it’s not out of the question. 

FTSE 100: Santa rally ahead?

December has earned itself a reputation for being the strongest month of the year for UK share prices. In fact, research by Stephen Eckett (and published in Harriman’s Stock Market Almanac) has shown that the FTSE 100 index has fallen just three times in the month since 1995. It even has a habit of outperforming the US S&P500!

Interestingly, there doesn’t appear to be one clear reason for this. What we do know however, is that the final two weeks of December tend to be particularly strong.

Known as the ‘Santa Rally’, here’s why I think this may happen again in 2020.

Why 7,000 might be broken

It seems logical that further good news on coronavirus vaccines could push the FTSE 100 higher. Having received positive results from Pfizer, Moderna and AstraZeneca in the past few weeks, it’s now the job of the Medicines and Healthcare products Regulatory Agency (MHRA) to give its approval. Expect fireworks if we get this in December.

The psychological effect of emerging from lockdown restrictions shouldn’t be underestimated either. While many UK businesses will continue to struggle, the mere belief that things are improving could send share prices higher on its own. Remember — the market is more interested in what will happen next, not what’s happening now.

Despite recent gains, UK shares also remain cheap relative to elsewhere in the world. News of a Brexit trade deal would undoubtedly go some way to addressing this. Further monetary stimulus in the US would be another boost.

On the other hand…

Of course, there’s also no shortage of reasons for why the FTSE 100 will fail to break through the 7,000 barrier.

Aside from the possibility of unexpected hurdles for the aforementioned vaccines, there are fears that coronavirus infection rates could rise as a result of families being allowed to meet over Christmas. This ‘two steps forward, one step back’ state of affairs could slow momentum.

With chancellor Rishi Sunak warning that the full economic impact of the pandemic has only just begun, many in the UK may also be inclined to keep their purse strings tightened until 2021. That’s problematic when you consider how dependent most of the UK’s listed retailers — and their share prices — are on the festive period for sales.

In addition to all this, many traders may begin to bank whatever profits they’ve managed to make in 2020. 

Don’t time the market

It is, of course, impossible to say for sure where the FTSE 100 will be at the end of next month. As such, my investment strategy remains the same. Like top UK fund manager Terry Smith, I’m looking for top-quality companies trading on reasonable valuations that I can hold for years. 

After a rollercoaster 2020, a soaring FTSE 100 would be a nice Christmas present for UK investors. Just don’t bank on it. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers 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.

More on Investing Articles

Dividend Shares

£3k in savings? Investors could consider putting it here for juicy second income

Jon Smith talks through how investors could buy dividend stocks with yield potential in excess of 6.5% for second income

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

Why the boohoo share price soared by almost 14% in November

Is troubled online fashion retailer boohoo beginning a turnaround that may cause the share price to rocket through 2025 and…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

Here’s how saving £5.40 a day could net me £1,971 yearly passive income for life

The price of a cup of coffee seems to have broken the £5 mark. Is it time to put that…

Read more »

Investing Articles

2 top FTSE 100 stocks surging to record highs (hint — not Rolls-Royce)!

Ben McPoland takes a closer look at a pair of high-performing FTSE 100 stocks that continue to enrich long-term shareholders.

Read more »

Investing Articles

A cheap FTSE 100 share to consider buying for the next 10 years!

This FTSE 100 share has pride of place in my portfolio. Here's why I think it could be a top…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Down 44% in 2 months! Is this FTSE 250 green energy pioneer priced too cheaply?

After a sharp tumble in recent months, this FTSE 250 company with a growing order book is almost 90% below…

Read more »

Investing Articles

Investing a £20k Stocks and Shares ISA in this high-yielder might give me a £2,000 annual income

Harvey Jones is now wondering whether to pour his entire Stocks and Shares ISA allowance into a single FTSE 100…

Read more »

Investing Articles

Saving £20k in an ISA? Here’s how I’m aiming to turn that into a stunning £2,035 monthly passive income

Harvey Jones is keen to build a high and rising passive income by investing in a balanced spread of top…

Read more »