Will the ‘Trump trade’ climax lead to the FTSE 100 sinking to 6,000?

Is the FTSE 100 (INDEXFTSE:UKX) about to enter a bear market?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 has gained over 2% in 2017 to reach 7,300 points, yet its future is hugely uncertain. Investors have thus far been focused on Donald Trump’s economic policies, with higher spending prospects causing more bullish sentiment. However, this week has seen a pullback, and investors are now wondering whether the ‘Trump trade’ is over. If it is, could the FTSE 100 really slump to 6,000 points and therefore enter bear market territory?

Trump’s policies

The effects of Trump’s lower taxation and higher spending policies are a ‘known unknown’. However, history tells us that spending larger amounts on areas such as defence and infrastructure, while at the same time reducing taxes, leads to improved economic performance. Those policies are likely to create jobs, lead to higher consumer spending and business investment, as well as improved confidence in the future performance of the economy.

The reality is that implementing those policies is likely to be challenging. The process through which they need to go before they can put in place will take time, and there’s likely to be a further time lag of some sort before they start to make a material difference to economic data.

Furthermore, there are also risks attached to adopting a more relaxed fiscal policy. Higher inflation is becoming increasingly likely, although this may be kept at bay to some extent by a rising interest rate. Additionally, higher debt levels could lead to fears surrounding the sustainability of the US budget deficit, which may harm investor confidence in future.

Share price movements

Due to the lack of clarity regarding Trump’s policies and their impact on the US economy, investors are likely to face a prolonged period of uncertainty. In fact, the movements seen in the FTSE 100 since the start of the year could continue in the coming months. Although the index has gained over 2% in the year-to-date, it has also been relatively volatile, as investors have switched back and forth between bullish and bearish stances.

This volatility could mean that the FTSE 100 falls in the near term. Trump could face difficulty delivering on his policy aims, while investors may become fearful about the potential ill-effects of higher spending and lower taxation. This could create buying opportunities throughout the course of the year for long term investors who can accept that there could  be volatility over a sustained period.

Investment outlook

However, the FTSE 100 falling to 6,000 points seems somewhat unlikely. While it cannot be ruled out, the optimism surrounding such a major increase in government spending in the world’s largest economy is likely to mean that bullish investors ultimately overrun their bearish counterparts. This is likely to mean a rise in the FTSE 100’s level in the long run. And since sterling could weaken as Brexit talks commence, the outlook for FTSE 100 companies with international earnings could be even more positive.

The ‘Trump trade’ may not yet have reached its peak. After all, the new President has not yet put in place the ambitious fiscal policy he campaigned on. Therefore, the FTSE 100 seems more likely to gain, rather than lose, 20% (or 1,300 points) over the long run. This would make 8,600 more likely than 6,000, from today’s current level of 7,300, in 2017 and beyond.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »