The FTSE 100 opened at a new all-time high this morning as markets around the world celebrated the US Federal Reserve’s decision to raise interest rates again for the second time in four months.
After almost a decade of near-zero interest rates, investor optimism surrounding the Fed’s decision to increase rates is understandable, as it signals that the period of economic instability brought in by the financial crisis may finally be coming to an end.
Since the beginning of December, the FTSE 100 has charged higher by 10%, and there’s a general feeling of optimism among investors, which indicates that there could be further gains ahead for the UK’s leading index.
Over the past year, the index’s gains have been driven by the miners, which have staged a staggering comeback since their 2016 lows. Banks have also helped contribute to the rises, and a weak pound has turbocharged earnings growth for all companies with international operations.
Naturally, after such a strong performance from virtually all of the FTSE 100’s constituents (shares in Glencore and Anglo American are up by 370% and 460% respectively since January 2016) investors are bound to be sceptical that these gains can continue. Even though optimism among the ranks of investors is high, it’s difficult not to be at least slightly concerned about what the future has in store for the FTSE 100, considering what’s happened when the index has reached such levels in the past.
What’s in store for the FTSE 100?
It’s impossible to tell what’s ahead for the FTSE 100. Trying to time the market is a risky game that’s likely to cost you more money than you stand to make, so it’s generally easier (and cheaper) to avoid market timing bets. That said, the general mood among investors indicates that the rally may last for some time yet unless there’s a major upset.
For long-term investors then, there is still time to buy the FTSE 100 and its constituents. The index is comprised of the UK’s best blue-chip companies, all of which have wide business moats, strong balance sheets and a record of returning cash to investors. All of these qualities mean that over time, shares in these companies should head higher. Over the long term, it’s likely the returns from all of the FTSE 100’s constituents will be positive, no matter which direction the index moves in the short term.
Put simply, there may be more records ahead for the index in the coming months and years, and investors still have time to buy into this rally. What’s more, some of its constituents still look cheap, such as companies like Royal Dutch Shell, which currently offers investors a dividend yield of 6.8%. As companies like Shell drift back onto investors’ radars, they could lift the index to new records.
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Rupert Hargreaves owns shares of Royal Dutch Shell B. 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.