The UK economy isn’t in a great place right now. Even though we aren’t in a technical recession yet, we’re forecast to endure one this year. High inflation and a lack of economic growth leads to stagflation, something that’s incredibly undesirable. Yet despite all this, the UK stock market is pushing higher and higher. The FTSE 100 is up 17% since the middle of October, and is only a few points away from hitting all-time highs. Why is this?
Inflation peaking
The latest figures for inflation this morning showed that it’s still very high, but is moving lower. The December number was 10.5%, lower than the 10.7% in November and off the high of 11.1% in October.
It’s still way too early to celebrate, but investors like to try and think ahead. If we have seen the peak of inflation, this could spell great news for stocks later this year if it continues to fall. On that basis, easing cost pressures for companies could boost profits.
Interest rates nearing the high
Lower inflation figures also eases pressure on the Bank of England to aggressively raise interest rates. It appears that the central bank will go ahead with another 0.5% hike in February. However, we could be near the end of the rising rates cycle.
Again, this is a positive for the stock market. It helps to reduce the impact of raising new debt for businesses. I think some are already factoring in that the central bank will be finished with interest rate movements by late spring and buying stocks now ahead of that potential pivot point.
Better risk sentiment
When I talk about risk sentiment, I’m referring to how confident people like me feel about buying shares. If my risk sentiment is positive, then I’ll buy stocks. The opposite applies if I feel sentiment is negative.
Even though it can sometimes be hard to pin a reason on why sentiment in the market changes, it can change very quickly. This is something that has definitely helped the FTSE 100 and other UK assets to appreciate in value over the past couple of months. Some refer to a Santa rally in December, or a January bump as everyone starts the year. Either way, it’s helped push the market higher.
The global nature of the stock market
In the FTSE 100, most of the stocks are global in nature. This means they sell around the world and have operations in various countries.
Recently, we’ve seen positive developments that have helped such firms. For example, China has reopened its borders and eased restrictions. This makes it easier for those that manufacture in the country to increase production and ship goods quicker.
With events like this being noted in different places, the UK stock market constituents benefit, even if the good stuff happens outside the UK.
Direction from here
The main risk for the FTSE 100 from breaking higher towards 8,000 points remains the state of the economy. I still feel it’s incredibly fragile. Energy bills remain very high and inflation above 10% isn’t something that can be ignored.
I feel I can take advantage of this boost, but in a cautious way, by drip-feeding money into the stock market on a regular basis.
