Last Thursday, the FTSE 100 traded above 7,600 points. Unfortunately, the high volatility we’re seeing at the moment meant that it fell below 7,200 points yesterday. The whippy movements show that investors are quite active and having to react quickly to unfolding situations. Yet when looking past the short-term noise, could new all-time highs at 8,000 points still be a possibility in 2022?
The case for the FTSE 100 reaching 8,000 points
One reason why I think the FTSE 100 could break to new highs is changes in expectations regarding interest rates. If I rewind a few months, high inflation was causing many to think that the Bank of England would need to raise rates significantly to try and reduce rising prices. However, at the meeting last week, the committee was a lot more cautious about the need to raise interest rates further.
If this language carries through into action and investors don’t expect more hikes this year, the FTSE 100 should lift. This is because higher interest rates are generally bad for large companies. Many have debt on the balance sheet. Higher rates mean higher interest payments, ultimately making debt more expensive.
Another reason why the FTSE 100 could jump higher is improved market sentiment. The war in Ukraine has been one of the catalysts that has hurt the index over the past couple of months. If we see peace in coming months, this could provide a major sentiment boost to the stock market, particularly for those companies that have exposure to Eastern Europe.
Other sentiment boosts could be around a more stable political situation at Westminster, as well as lower energy prices that would reduce the economic burden on many in the UK.
Reasons why it might not happen
On the other hand, 8,000 points could still be a long way away. Firstly, when I look at the charts, I note that 7,700 points has been a barrier that has been tried several times in the period from 2019-2022. The FTSE 100 hasn’t managed to meaningfully break through and hold above this price.
If it managed to do this, then the next level to target would be the current all-time highs from 2018 of 7,877 points. Only if it managed to break this as well would 8,000 points really come on the radar. So from that technical angle, there are clearly a lot of hoops to jump through first!
A second point of concern is that the UK could be heading for a recession at the end of the year. The Bank of England forecasts for GDP from last week highlighted the potential for economic activity to slow in Q4. Clearly, forecasts aren’t always correct, but if we did see recession fears heightening towards winter then the FTSE 100 would likely head lower, not higher.
My investing plan
Regardless of where the FTSE 100 heads, I think I can outperform it as a benchmark by actively picking good stocks for my portfolio. This gives me complete control of what I hold and allows me to try and protect myself against further stock market slumps.
