The FTSE 100 has managed to break fresh ground this week, trading and holding above 7,500 points for much of the time. Yesterday we hit levels not seen since early June. The next level to note is in the 7,600-7,650 region. The index has reached it several times this year but failed to move beyond it. So what comes next from here?
The case for 8,000 points
Although it sounds a heady figure, 8,000 points would only require a 7% move higher for the market from current levels. So I’m not discussing an outlandish double-digit percentage move over the course of the next few months.
To reach this level, I think we’d need to see a meaningful uptick in investor sentiment. To that end, there are several points that could help achieve this.
A key one would be a resolution to the war in Ukraine. The war has wreaked havoc with global supply chains, commodity prices and economic growth in Europe and beyond. Although I don’t see a peaceful end to the war coming quickly, I do think it’s plausible to have some resolution before the end of the year.
In this case, I’d expect an instant market rally based purely on optimism. From there, I’d then expect a second rally in the months that followed as FTSE 100 companies are able to reopen operations in the region. Higher revenues and more upbeat earnings outlooks that follow would be able to lift the index as a whole.
Another reason for a rally could be the new Prime Minister. In less than a month, we’ll have a new head at Number 10. If this administration starts with tax breaks, lower VAT and other fiscally generous measures, it could provide a boost for UK shares.
Why the FTSE 100 might slump to 7,000 points
The main concern that I think could drag the FTSE 100 lower from here is persistent inflation. The latest figure for July that came out yesterday was an eye-watering 10.1%. Expectations are for prices to continue to rise in the coming months.
High inflation is usually bad for the stock market. This is because inflation forces central banks to raise interest rates. Higher interest rates increase the cost of issuing new debt and servicing existing debt for businesses.
Rampant inflation also causes consumers to spend less as their purchasing power decreases. So any business that deals directly with people could see a decrease in demand.
With the Bank of England poised to rate interest rates by another 0.5% in September, I think the base rate could increase to 3% by the end of this year (it’s currently at 1.75%). If this scenario does play out, I struggle to see the market being able to rally.
My investment ideas
Yet if the market does rally from here, perfect. However, by investing in specific sectors that I think could perform well even with elements like high inflation, I’m not overly concerned. That’s why I prefer to actively invest and choose my own stocks rather than using a FTSE 100 tracker.
