Will the FTSE 100 return to 7,000 points this year?

The FTSE 100 (INDEXFTSE: UKX) is currently up 86 points (1.3%) today. This bucks the recent trend of falls in the UK’s main index, with investors seemingly now more upbeat about its long-term prospects.

In fact, the index needs to rise by just under 3% to reach 7,000 points. The last time the FTSE 100 reached such heights was in May 2015, but it only spent a matter of weeks above the psychological 7,000 points barrier before slipping back down.

Today, the FTSE 100 faces greater challenges than it did back then. The global economic outlook is less upbeat than it was in 2015. Certainly, commodity prices have stabilised somewhat and there’s optimism that the oil price will continue the gains it has made in 2016. Furthermore, the Chinese economy is now in a healthier state than it was in 2015 thanks to stimulus measures. However, the overall outlook for the FTSE 100 is tougher now due to Brexit, the US election and perhaps most importantly, US interest rate rises.

Rate rises

On the latter, the FTSE 100 is set to respond negatively when the Federal Reserve raises rates. This may not happen in the coming weeks, but it expected over the next year. The last time the Federal Reserve raised rates, the FTSE 100 responded by plummeting to as low as 5,700 points in the weeks following the decision. While the same level of impact may not take place this time around as it’s not the first upwards move, it could nevertheless cause investors to adopt a more risk-off attitude.

This would be bad news for the FTSE 100. A higher US interest rate could choke off the country’s economic recovery. Since much of the FTSE 100 is made up of internationally-focused stocks, the global economic outlook is arguably more important for them than the prospects for the UK economy.

However, with Brexit being such a major change in both a political and economic sense, those companies in the FTSE that have considerable UK exposure, such as banks and retailers, could find their share prices coming under pressure.

Already since Brexit the wider banking sector has endured a volatile period while the full effects of anticipated rising unemployment are yet to be felt. With the UK economy forecast to grow at only a snail’s pace in 2017 according to the Bank of England, investors may become somewhat nervous about the FTSE 100’s prospects and cause it to miss its 7,000 points level over the near term.

Of course, before the end of the year we will know who the next US President will be. In the run-up to the election it would be unsurprising for investors to take less risk because of the uncertainty that each candidate will bring in terms of their differing policies to the current administration. This could negatively impact on the FTSE 100’s performance between now and the end of the year.

Although the FTSE 100 is just 3% off the 7,000 points level, getting there may not be that easy. In the long run, its future is bright, but in the short term there may be significant volatility and opportunities to buy shares at discounted prices.

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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.