After a year of impressive performance, it now looks as if the FTSE 100 is on the back foot. Indeed, over the past few days, it has become painfully apparent how dependent the UK’s leading index is on the value of sterling and how most of the index’s gains since last summer have come as a result of sterling’s devaluation.
Over the past five days, the FTSE 100 has fallen by 3.2%. At the same time the value of sterling against the dollar has risen by 2.1% and if the currency continues to strengthen it is not unreasonable to assume that further losses for the FTSE 100 could be on the cards.
Plenty of uncertainty
Unfortunately, it’s not just sterling that’s pointing to pain for the FTSE 100. The index charged to a new high during March for many different reasons. First of all, the value of sterling against the dollar dropped to a near post-Brexit low, which made the index cheaper for overseas buyers and had the added effect of boosting earnings for those FTSE 100 constituents that report in US dollars. At the same time, markets around the world were celebrating Donald Trump’s election. Trump’s proposed $1trn infrastructure spending programme and much-touted regulation bonfire, convinced investors the only way for markets was up. The deluge of infrastructure spending would have led to higher inflation, which in turn would have meant higher interest rates, and more economic growth.
All of these Trump-induced benefits would have been good for most companies but specifically banks, which make up a large part of the FTSE 100. Miners would have also have benefitted thanks to higher demand for raw materials.
However, so far none of Trump’s promises have materialised, and analysts are now starting to question if they ever will. The inability of Trump to press forward with his proposed healthcare reform is being seen as a red flag that he might not live up to expectations.
What does this mean for investors?
What does all of this mean for investors? In a word, uncertainty. Trump’s lack of political progress, coupled with another general election in the UK, France’s election and Brexit all make a cocktail of uncertainty for investors. And unless central banks step in to flood the system with yet more easy money, uncertainty might push the market to take the path of least resistance, which is down.
So overall, even though only a few weeks ago it looked as if the FTSE 100 might be on the way to 8,000 it now looks as if, with uncertainty building, the index will do what it has done many times before and fall back by 10% to 20% as uncertainty prevails and investors shy away from risk.
Look to the long term
That being said, even though the FTSE 100 might look as if it’s got further to fall, trying to time the market will probably end up costing you more than you stand to make.
That’s why here at the Motley Fool we believe it’s best to invest in well-researched stocks and look to the long term. Using this strategy will help you navigate the market gyrations with ease.
