The FTSE 100 has posted gains for nine straight days in a bounce-back stock market rally. Incredibly, the index was trading close to 5,500 points only a couple of weeks ago. From here, we’ve seen a very strong move higher, breaking above 6,300 points on Wednesday morning. Some individual performers have even exceeded the 15% gain in the FTSE 100 index. I wrote how both Rolls-Royce and IAG gained over 35% in a single day on Monday.
The stock market rally will have come as a surprise to some, given the bleak UK economic outlook and the fresh English lockdown for November recently imposed. But if 2020 has taught me anything, it’s to expect the unexpected! From here, I feel there are several plausible reasons as to why the FTSE 100 could rally another 11% to 7,000 by year end.
Optimism-fuelled stock market rally
The two key drivers behind the short-term rally in the stock market are the US election result and the vaccine news. We saw a ‘Biden bounce’ after the former Vice-President secured enough votes to ensure he will be the next sitting President. This allowed the markets to price out the uncertainty of the election and move on. Regarding the vaccine, news that the joint effort from Pfizer and BioNTech has 90% effectiveness was also positive. Its rollout could allow many companies to perform much better in a shorter timeframe than was expected by investors.
The optimism from the above events was not just a driver of a stock market rally over one day. This move has continued over several days and could easily carry on for longer. After all, the FTSE 100 index is still down around 16% from the start of the year. So there’s a lot of room to move higher before the index starts to look overbought.
This stock market rally could also head higher if we hear other good news. The obvious one here would be a Brexit agreement. Any agreement could see the FTSE 100 spike higher. Sectors such as financial services and materials would likely lead the charge, but there are few firms that wouldn’t benefit from increased clarity on trade agreements between the UK and EU.
Central bank stimulus
Another reason for the market continuing to rally is the amount of stimulus the Bank of England and other central banks are pumping into economies. We’re seeing a wide variety of measures and continued low interest rates. Such low rates encourage people to invest rather than sit on their cash due to the lack of opportunity cost. The high level of quantitative easing also means institutional investors have plenty of funds that need to be put to work. The logical place for it these are in the stock market.
This becomes a self-fulfilling prophecy, as the more the stock market rallies, the more money is invested into it. Rightly or wrongly, this can lead to a longer-term rally. So on the basis of the above, a 15% rally in two weeks could easily be followed another 11% in six weeks, which would take us to the 7,000 mark.
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