FTSE 100 volatility is just the start of things to come…

Since the start of the year the FTSE 100 (INDEXFTSE: UKX) has been as low as 5,535 points and as high as 6,400 points. That’s a range of almost 900 points in just a six-month period, which shows that investor sentiment has changed rapidly during that time.

Of course, high volatility has been present in the last week, with the FTSE 100 recording a stupendously large gain on Monday following polls that showed that Remain was gaining ground in the EU referendum. In fact, the FTSE 100 was up by as much as 3.6% on Monday and this shows that if the UK decides to stay in the EU today, then share price gains could be on the cards tomorrow and into next week. That’s because investors are likely to have priced in the short-term risk of a Brexit to at least a certain degree in recent weeks and months.

Similarly, a vote to leave the EU today would be likely to cause a sudden drop in the FTSE 100’s price level. That’s not necessarily because leaving the EU is a bad idea in the long run, but rather because it would inevitably lead to a degree of uncertainty in the shorter term as the ‘divorce’ between the UK and the EU is arranged.

Other risks

Clearly, the result of the vote is finely balanced, but either way volatility is set to be a feature of the coming days as investors react to the outcome. However, even once the EU referendum is done and dusted, the FTSE 100 is likely to remain exceptionally volatile since there are a number of other risks just waiting to fill the void created by today’s vote.

Another vote that’s on the horizon and that could cause a similar degree of uncertainty in the coming months is the US Presidential election. This has the potential to upset market sentiment at the best of times. But with a new President being elected and the fact that at least one of the candidates has courted controversy in the nomination process, it would be unsurprising for investor sentiment to weaken as the election date gets closer.

That’s not to say either candidate would be a good or bad President, but rather with the potential for major policy change it would be unsurprising for investors to adopt a more risk-off attitude. In which case, the outlook for the FTSE 100 remains challenging and volatility looks likely to remain high, and if not become even higher as the year progresses.

After all, the FTSE 100 is made up of global companies and with the US being the largest economy in the world, it has the biggest impact on the world’s macroeconomic outlook. As such, it may be prudent for investors to keep a lid on the amount of risk they take by seeking out wide margins of safety, checking the balance sheet strength of the companies they own and keeping cash on hand to take advantage of any dips in the FTSE 100’s price level that may come along in future.

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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.