Major UK stock market indexes experienced mixed fortunes in Q1 2022. While the FTSE 100 rose slightly, the FTSE 250 took a big tumble.
So, how is the stock market likely to perform during the second quarter of the year? Let’s take a look.
[top_pitch]
How did the stock market perform in Q1?
It’s fair to say that 2021 was a year to remember for the FTSE 100. Last year, the value of the index climbed a mighty 14%. Yet, so far in 2022, the performance of the index has been less than impressive.
During the first quarter of the year, the collective value of FTSE 100 constituents has risen just 0.14%. If the FTSE 100 continues on this trajectory for the rest of 2022, then the blue-chip index is heading for a misery 0.5% gain over the year.
However, if you think the FTSE 100 has performed below par, it’s worth knowing that the FTSE 250 has had a far worse experience in Q1. The UK’s second-largest index, comprising the 101st to the 350th biggest companies listed on the London Stock Exchange, has fallen a massive 11.45% since the year began.
Like its cousin, the FTSE 250 had a heavenly performance last year. Over the course of 2021, the index soared 14.6%.
[middle_pitch]
How will the stock market fare in Q2?
Given the contrasting fortunes of major stock market indexes this year, you may be thinking it’s extremely difficult to predict the fate of the stock market – and you’d be right!
However, there are a number of factors worth keeping an eye on over the next three months. That’s because each of these factors is likely to have a massive impact on stock market performance between April and June.
Let’s take a closer look at what these factors are likely to be.
1. The war in Ukraine
Ever since Russian tanks entered Ukraine on 24 February, the future has felt a lot more uncertain. This has been reflected in the stock market, with both major indexes sinking in the days following the invasion. While the FTSE 100 and FTSE 250 are both now higher than they were on 24 February, there is still a lot of uncertainty surrounding the ongoing war and its potential impact on the global economy.
However, if better news is around the corner, such as a ceasefire announcement, then it’s probable that the stock market will react positively. On the flip-side, should the opposite happen and the war escalates, then the stock market is likely to take a turn for the worse.
2. The rising cost of living
On 1 April, the energy price cap rises. The new price will add almost £700 to the average energy bill, and there are fears costs will further increase later in the year.
This increase, coupled with the National Insurance (NI) hike, is likely to place enormous pressure on our wallets. While the government has made efforts to reduce the impact of the NI rise for some, changes to thresholds won’t be in place until July.
So, for the next three months at the very least, there’s no doubt many will have little choice other than to tighten their belts. This, of course, means many will be facing the prospect of having less disposable income. This is likely to harm the profit margins of businesses, particularly those reliant on frivolous consumer purchases.
Also, don’t forget that higher costs, including the energy and NI hikes, will directly impact businesses too. In fact, it could be argued that rising energy costs will have an even bigger impact given businesses do not benefit from any price cap.
So, as a result of these two factors, it’s easy to see how the rising cost of living could see share prices suffer over the coming months.
3. Inflation
The UK inflation rate currently stands at 6.2%. To say this is significant is an understatement. That’s because inflation hasn’t been this high in over 30 years. Sadly, things could get even worse. The Bank of England expects inflation to hit 8% by June.
In order to cool inflation, the UK’s central bank has the power to increase its base rate. It has already done this on two occasions this year, and the markets expect further hikes this year.
Rising interest rates can harm share prices as it increases the cost of servicing debt for businesses. It is also another factor that can directly impact the disposable incomes of consumers.
Of course, it’s worth knowing that the stock market is already aware of the rising inflation issue. So, if inflation unexpectedly begins to slow in Q2, this would almost certainly go down well with investors. However, if inflation continues to soar, the stock market could easily slump.
Are you looking to invest? If you’re keen to give the stock market a go in Q2, take a look at look at The Motley Fool’s top-rated share dealing accounts.
