Predicting an accurate level for the FTSE 100 (INDEXFTSE: UKX) at Christmas is basically impossible. Today I’m going to look at what the key drivers of the FTSE 100 have been in 2016 that could affect its performance by year-end.
As we all know the UK voted to leave the EU last week. This news sent the FTSE 100 sharply lower and currently London’s blue chip index is down around 330 points (2.7%) since the result. This is a sharp fall but nothing compared to the 7% fall in the FTSE 250 (INDEXFTSE: MCX) over the same space of time. This is because the FTSE 100 is made up of bigger corporations that are headquartered in the UK but also have large operations around the world. This means that uncertainty in the UK won’t impact companies as much as those that solely operate here. However, even though most of the FTSE 100 businesses operate around the world, each company will still have some exposure to the uncertainty that has come with the Brexit vote.
Commodities bull market
The commodity super cycle looks to be bottoming. Oil, gold and silver, to name a few, have been rallying quickly off their lows and money managers are beginning to look at the sector again. An important factor to remember is that 17% of the FTSE 100 is made up of basic resources and oil stocks such as Royal Dutch Shell (LSE: RDSB). This means that if commodity prices continue to tick up then the FTSE 100 should follow too. This gives some scope for resource stocks to prop up the FTSE 100 in the next few months.
The world economy seems to be slowing. While many expect growth to slow down, it’s still unlikely we’ll see a financial collapse like that of 2008/09. This general slowdown should cause the FTSE 100 to drift lower as corporate earnings dip across the world. Equity markets haven’t priced-in any of this yet and it’s astonishing to see US equities near all-time highs. Negative interest rates are another clear sign that the global economy is struggling.
US economy woes?
The US economy looks like it may stumble too. May’s jobs data was extremely poor and much of the recent manufacturing data has been at levels not seen since 2008 and 2009. The Federal Reserve has delayed rate hikes and it looks as if there will only be one this year. To me this is a clear sign that policy-makers are worried about the economy. A key indicator will be the timing of the next interest rate hike, many economists believe it could now be December before another.
These issues are some of the key factors that investors must be looking at. In my opinion the FTSE 100 will finish 2016 much lower than the current levels. I think this will be in response to the uncertain future of the UK along with a general economic slowdown around the world and especially in the USA.
Jack Dingwall owns Royal Dutch Shell shares. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.