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Can the stock market rally continue?

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Screen of various price trends, possibly in FTSE 100
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Observing recent trends in the FTSE 100 index, I was left wondering if we are still in a stock market rally. After all, the index levels keep dipping back to sub-7,000 levels. 

So I decided to take a step back, and look at the bigger FTSE 100 picture. 

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Turns out that the stock market has indeed been making gains. 

Robust FTSE 100 trends

May has actually been a very good month so far. Up till now, on average the FTSE 100 index value is just north of 7,000. 

If this trend continues until the end of the month, it will be the first such instance in 15 months. The last time that the index closed above 7,000 was in February or before the pandemic struck. 

Also on a year-on-year basis, the FTSE 100 index is now in its third consecutive month of double-digit gains. It is up 18% compared to May 2020. 

The weak points

While these are definite positives, I am still wondering if the stock market can continue to rise further. Or can it rise fast enough to be called a “rally”. Here is why.

The index has fallen from last week. The fall is negligible, but it is there. Further, monthly growth is underwhelming. So far in May the index has grown by only 1.6% compared to a 3.1% increase last month. 

Not too long ago, in February, the index had actually fallen by 1.8% from the month before. So it is possible that the same can happen again. 

Also, at a macroeconomic level, expectations of an inflation spike have shaken investor confidence. Companies have increasingly pointed at inflation as a growing risk. Their costs are rising and some of them are passing these on to end customers as well.

This has already started showing up in consumer prices. The US economy reported some ugly inflation numbers recently. Rising inflation is visible in the UK as well. High inflation can raise costs sharply and calls of knee-jerk policy reactions, which in turn can slow down growth rates.

Looking ahead

But I take heart in the fact that central banks think it is still a wait-and-watch situation. In other words, they do not think that inflation is certain to stay elevated. 

Furthermore, the real growth spurt is yet to kick in. This is especially so in the UK, which will fully come out of lockdown only next month. While this could be inflationary too, inflation during high growth phases is to be anticipated. The more important aspect of high growth here is that it can support stock markets. 

What’s next for the stock market rally?

In sum, I think that as a FTSE 100 investor, I have much to look forward to. I see the current, if I may say, dull phase, as an opportunity to buy rather than give into doubts about the future. 

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Manika Premsingh 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.

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