Why the next six months are make or break for the FTSE 100

With the EU referendum less than two weeks away, many investors may be thinking that once it’s out of the way the FTSE 100 (INDEXFTSE: UKX) faces no further immediate risks.

That’s not to say that the FTSE 100 will necessarily fall or rise on a vote to leave or remain, since nobody knows exactly how investors will react to either decision. But it does mean that such a major vote brings uncertainty that could cause investors to adopt a more cautious, risk-off attitude and could mean that the FTSE 100 records lacklustre performance.

Of course, the EU referendum kicks off what’s a crucial period for the FTSE 100. This month sees the US Federal Reserve also meets to decide whether now is the right time to increase interest rates. This poses a serious threat to the FTSE 100’s near-term performance, since it has the potential to dampen investor sentiment as a tightening of monetary policy could cause the US economy’s recovery to slow somewhat.

The last time the Federal Reserve increased interest rates, the FTSE 100 endured a highly challenging period. The same could realistically happen again. While there would be less of a step change in policy from the Federal Reserve, comments made regarding the potential for future rises could hurt investor sentiment and the FTSE 100’s performance. In other words, if rates are raised and it’s indicated by the Federal Reserve that more rate rises are around the corner, many investors may become concerned about the future performance of the US and global economies.

The China question…

On the topic of the global economy, the outlook for China remains uncertain. In recent months concerns about the world’s second-largest economy have died down somewhat and the FTSE 100 has recorded a recovery of sorts.

However, China is continuing to transition away from a capital expenditure-led economy and towards a consumer-focused economy. In the long run this should be good news for the consumer goods companies and financial services business listed on the FTSE 100 that stand to benefit. But the transition may not prove to be smooth and investor sentiment could come under pressure over the short-to-medium term.

…and the US

In addition, the US will have a new President within a matter of months. As things stand, it really could go either way and this could cause investor sentiment in global stock markets to decline in the months prior to the vote. This wouldn’t be good news for the FTSE 100 and may mean that the index falls so as to price in a wider margin of safety in case of new, more radical policies being introduced by a new President.

So, while the EU referendum is a key vote that’s likely to impact on the FTSE 100, it’s merely the first in a number of important events set to take place in the next six months. As such, we’re entering a make-or-break period for the UK’s leading index.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.