In the past month, the FTSE 100 has added over 400 points. Currently at 7,708 points, it has room to run before reaching the year-to-date highs above 8,000. Although some are chattering about a market crash, it’s worth considering the other side of the argument. After all, there are several reasons why the market could be on the edge of a bull run.
Interest rates peaking
The move from the Bank of England to hold interest rates steady for the first time in 14 meetings on 21 September was big. Could it be that we’ve reached the highest rate in this cycle? Quite possibly. If this is the case, it’s good news for the stock market.
If the base rate doesn’t go any higher (or even starts to fall), investors would take this as a positive sign. Lower interest rates help to stimulate demand in an economy, giving people an incentive to spend rather than save.
Inflation on the way down
In January, inflation was at 10.1%. Data out earlier this week showed that it fell again from last month. It’s now at 6.7%. Granted, it’s still above the 2% central bank target rate. But it’s continuing to move lower, which is a good sign.
If this continues into the end of the year, I feel this could be a catalyst for a stock market bounce. Lower inflation eases pressure on corporate profit margins.
The benefit of higher oil
Some of the largest constituents in the FTSE 100 are related to oil. This includes the likes of Shell, BP and Glencore. Over the past couple of months the oil price has surged, with WTI now around $90 per bbl.
Analysts are forecasting this could reach over $100 soon, which would be of huge benefit to oil-linked stocks. Given that the index is weighted by market cap, if these large-cap stocks rally it could have a disproportionately positive impact on the FTSE 100 overall.
British pound underperformance
The British pound is currently at the lowest level since Q1 against the US dollar. It has also weakened significantly against the euro over the past month.
This could actually help to spark a stock market bull run because foreign investors will see it as an attractive discount purchase. By selling currencies to buy cheap pounds and then overlay this with buying FTSE 100 stocks, it could be a potential win-win. The size of investment from foreign investors shouldn’t be underestimated.
Here come the bears
Every debate needs to acknowledge the other side. I believe the risk to my view is stagflation. This is where an economy has inflation that isn’t slowing down and low (or no) economic growth. The UK economy is experiencing almost no GDP growth right now. If inflation doesn’t cool, then the stock market could underperform due to this double whammy of bad events.
But does this risk outweigh all of the potential reasons for a market rally? I don’t think so.
