Is the FTSE 100 likely to end the year lower?

The FTSE 100 has risen less than 1% since the year began. So, how likely is it that the UK’s largest share index will end 2022 lower?

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Scene depicting the City of London, home of the FTSE 100

Image source: Getty Images.

Following a decent performance in March, the FTSE 100 is now officially in the green for 2022. That said, the value of the UK’s blue-chip index is only a smidgen higher than when the year began.

So, what is behind the FTSE 100’s sluggish performance so far this year? And is the share index likely to end 2022 lower than it is now? Let’s take a look.

[top_pitch]

How has the FTSE 100 performed this year?

The FTSE 100 had a rough start to 2022. Over the course of January, the UK’s largest share index fell by 0.5%. February was an even worse month for the FTSE 100, with its value falling a further 1.02%.

Despite a turbulent start to March, the FTSE 100 did manage to recover its losses for the year by the end of Q1. Over the course of March, the share index gained a healthy 2.5%. Since then, during the first few days of April, the FTSE 100 has gained another 0.1%.

As of midday on Tuesday 5 April, the FTSE 100 stands at 7,546. That’s 0.5% higher than its (7,505) value at the beginning of the year.

How has the FTSE 100 performed in years gone by?

According to IG, over the past 35 years, the FTSE 100 has delivered an average annual return of 7.75%. Over the same period, the average rate of inflation, measured by the Retail Prices Index, was 2.7%.

So, in real terms, the FTSE 100 has typically delivered returns well in excess of the inflation rate in the years following its inception. However, these are average returns of course.

Taking a closer look at the share index’s more recent performance paints a more varied picture.

Year FTSE 100 annual return
2021 14%
2020 -14%
2019 12%
2018 -12%
2017 8%
2016 14%
2015 -5%
2014 -3%
2013 14%
2012 6%

Will the FTSE 100 end the year lower?

We know the average return of the FTSE 100 is 7.35% over the past 35 years. IG calculates this to be a ‘real return’ of 4.9%. Note that this figure takes into account returns minus the average annual inflation rate over the same period.

This ‘real return’ is important to take into account when considering the FTSE 100’s likely performance for the rest of the year. That’s because right now, the UK inflation rate stands at 6.2%. This is the highest level in over 30 years. On top of this, the Bank of England expects inflation to climb even higher. Its most recent estimate suggests inflation could hit 8% within the next two months.

It’s also worth noting that these predictions refer to the Consumer Prices Index (CPI). In contrast, the 2.7% rate of inflation measured historically uses the Retail Prices Index (RPI), which often gives a higher rate than the CPI due to the way it is calculated.

However, regardless of the measure of inflation you prefer, given the UK’s soaring rate of inflation, it’s likely the FTSE 100 will fall, in ‘real terms’ at least, by the end of the year. As the share index has risen just 0.5% in 2022 so far, if it continues on this trajectory, then investors may hope to earn a 2% return by the year’s end, which is well below the rate of inflation.

Of course, the stock market is rarely as predictable as this. The FTSE 100 could just as easily rise, fall or stay the same before the end of 2022. But given the rising inflation rate, the share index will have to work very hard to deliver any sort of return in ‘real terms.’

[middle_pitch]

Given rising inflation, should investors avoid the FTSE 100?

If you’re having second thoughts about buying a FTSE 100 exchange-traded fund, then you probably shouldn’t. At least not because of the UK’s soaring rate of inflation.

That’s because, as well as impacting equity values, rising inflation can also impact a host of other asset classes. While some investors may be tempted to turn to precious metals, such as gold, in times of soaring prices, there are no guarantees.

Instead, it’s better to invest with a long-term strategy in mind. It’s for this reason that we at The Motley Fool often highlight the benefits of a ‘buy and hold mindset.

If you are looking to buy shares right now, then do take a look at our top-rated share dealing accounts

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 considered so you should consider taking independent financial advice.

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