The FTSE 100 index has had good going for much of the past year now. Since vaccines were developed around 10 months ago, the index has seen month-on-month increases in eight of them. This translates into a significant 22% increase in the index during this time.
But here is what puzzles me. Despite all the gains made, the index has remained stubbornly below pre-pandemic highs. And for index watchers like me, this can get pretty frustrating, going by how close it has been to these highs for at least the past three months now. I reckon it will not remain so for too long, though.
Forecasting FTSE 100 increases
I think that there is a very good chance that the FTSE 100 index will be back to pre-pandemic levels before we call it a wrap on 2021. Consider this. On average, the index has risen at around 2% every month in the past year.
This means that if the consistent index increases continue, it will be a little over 7,400 on average in October. This is higher than the pre-pandemic level of February 2020. Moreover, by November this year, the index could rise to the even higher levels of around 7,500 last seen in January 2020.
Pandemic and macros could impact it negatively
While I think there is a good chance that this trend can play out, realistically speaking, I think some pull back can happen too. After all, there have been a few such months in the recent past too. Moreover, the pandemic is not completely over yet. Both coronavirus hospitalisations and deaths have been on the rise recently in the UK. While vaccines give hope that the trend can be contained, it could affect stock market sentiment.
Further, FTSE 100 companies can be impacted by their own circumstances as well. For instance, stocks that performed well last year could see a continued come-off as the surprise boom in sectors like grocery and food delivery, online shopping, and health and hygiene services winds down. Others like travel stocks may continue to remain weak as some reimposition of restrictions remains a real possibility at a time when their financials are already challenged.
Inflation can also impact demand across companies from packaging providers to retailers as customers buy less when prices are high. Miners can also see a softening in commodity prices as there is gradual withdrawal in public spending.
My takeaway
On the whole, though, I am quite optimistic. A lot of progress has been made in bringing the pandemic under control. Also, gainers from lockdowns may not be impacted very much at all. Some demand could have shifted permanently towards online shopping and delivery services. As far as inflation goes, policy makers still think it is a transient trend. On commodity prices, there is actually one belief that we are in a multi-year commodity price bull market.
Based on these arguments, I think that it is only a matter of time before the FTSE 100 index puts the pandemic behind it. Progress may still be slow, but I do think that it can go back to February 2020 levels before the end of the year.
