June is turning out to be a good month for the FTSE 250 index. On average, it has managed to stay above 22,000 for the third month straight. Note that this is not the first time that the index, which includes the 101st to 350th largest companies listed on the London Stock Exchange’s main market, has crossed this level. It is, however, the first time that it has on average remained above those levels.
The FTSE 250 index for June is averaging 22,757 so far. This brings it closer to 23,000 than ever before. In fact, earlier this month, it came to touching distance, closing at 22,908 before it receded again. Going by the gains made in the past few months alone makes me optimistic about the future.
Strong outlook for the economy
But this momentum itself is driven by fundamentals. The biggest one is the bounce back in the economy. It is true that the final easing of the UK’s lockdown has been delayed by a month. But it is also true that many sectors are already back in action. Non-essential retailers, pubs and restaurants, and cinemas are some examples.
And if forecasts are to be believed, things are about to get even better. The Bank of England expects the UK economy to grow by 7.2% in 2021. We have not even seen half that growth so far, so I reckon the next few months will show huge increases.
Companies post positive updates
This is evident in companies’ updates too, as would be expected. FTSE 250 housebuilder Bellway, for instance, has just said that it expects demand for new homes to remain strong for the rest of the year. Cinema chain Cineworld saw better than expected reopening with Peter Rabbit 2. And homewares retailer Dunelm reported profits ahead of analysts’ expectations. These are just a few examples.
Inflation and withdrawal of government support could hurt
But rising risks could spoil the FTSE 250 party too. One of them is inflation. It is likely that inflation will be high only for a brief time. There is much pent-up demand among consumers and businesses are just getting into the post-lockdown cycle. In time it can even out. But it is also possible that high commodity prices are sustained as big public spending by China and the US increases demand. I am watching this number closely.
Also, I am watching out for the rollback of government schemes. Policies like the furlough scheme and the stamp duty holiday have buoyed the economy so far. But the real test of economic strength will come when they are withdrawn.
My verdict for the FTSE 250 index
All in all, though, I am optimistic. I do not think that high inflation will slam the brakes on recovery. And going companies’ updates the recovery appears to be robust enough to sustain despite a withdrawal of government support. I think the FTSE 250 can touch 23,000 sooner rather than later.
Manika Premsingh has no position in the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.