Although up over 6% year-to-date, the FTSE 100 is down over 45 points in the past month. England’s ‘Freedom Day’ (July 19) led to a large slump in the Footsie. Although the government was keen to lift all restrictions on social distancing, face masks, and more, worrying data on Covid case led to a fall in the index. That said, last week still saw over a 2% rise. So, what does the rest of 2021 have in store?
Why did the FTSE 100 fall?
First, let’s take a closer look at why the slump occurred. The removal of all guidelines on 19 July dented both investor and businesses confidence in the stability and recovery prospects of the UK economy. You would expect the reopening of the economy to boost business, but coming at a time when Covid cases were growing, many believed this could have a dampening impact. If cases rise, even though the vaccination programme continues, the rest of 2021 could be plagued with high levels of self-isolation and even the reintroduction of other restrictions. This would likely lead to a fall in the FTSE 100.
To add to this, higher inflation rates have also had a negative impact on many businesses. As my fellow Fool Jonathan Smith explained, rising rates could lead to higher debt for firms.
Will it keep rising?
The next few months will be crucial, and I suspect that the performance of the FTSE 100 will be linked to the Covid situation in the UK. A rise in cases, or a change of direction by the government (Chief Medical Officer Chris Whitty has already hinted of the need for potential future lockdowns), would undoubtedly impact investors’ confidence levels.
Another issue with rising Covid cases is the effect it would have on certain sectors. For example, if flights are halted again, or if further countries join the government’s ‘red list’, we could see a fall in share prices. Rolls-Royce, a business that I analysed earlier this month, stand out in this respect. Compass, one of the world’s largest catering groups, could also take a hit should rules on large gatherings be altered. If cases continue to surge across Europe, there could be a delay in some countries reopening, affecting a raft of FTSE 100 stocks.
With all this said, I still don’t expect to see a major fall. I think the chances of the UK entering another full lockdown are slim. Also, countries are better equipped to deal with Covid now than when we saw the initial crash back in March last year.
Yes, I expect the rest of 2021 to be a period of volatility. We may see further periods of decline as recovery will be far from quick. However, as more economies reopen, I expect to see a gradual rise in the FTSE 100 towards pre-pandemic levels. A 21% drop in coronavirus cases over the last seven days is good news and could be the first signs of the third wave receding. The 183 point gain witnessed last week may have pre-dated more positive moves to come.
