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Is the FTSE 100 set for another slump in 2021?

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The FTSE 100 ended Tuesday up a modest 37 points. On a normal day, that would be unremarkable. But it came after Monday’s 168-point crash, on the day dubbed ‘Freedom Day’ as most UK Covid-19 restrictions were lifted.

At the same time though, the pound slid to a five-month low against the dollar, so the Footsie is doing less well in dollar terms. Still, at least the market seems to have stabilised for now. European markets steadied too, as did the US Dow Jones, which ended Tuesday 1.6% higher.

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Plenty of commentators had been condemning the Covid rules, and calling for ‘Freedom Day’ as early as possible. Once that happened, they claimed, businesses would get back to normal and share prices would all recover and start growing again. That was always an oversimplification. And I reckon it greatly underestimated the intelligence of Britain’s business leaders and the world’s investors.

As the reaction of the FTSE 100 on the day the rules were eased showed, the underlying reality and uncertainties are what count. It’s not the rules, which are entirely secondary to that. King Cnut famously knew that he couldn’t command the forces of nature. Hopefully Boris Johnson understands that too.

FTSE 100 outlook

So what’s the outlook like for top UK shares like now? Well, I think it could be way too soon to think of the great pandemic crash as over, even if many shares are on the way back up. Covid cases are on the rise again, as the Delta variant is spreading faster than ever. And that’s in the UK, with one of the best vaccination records in the world.

We’re unlikely to see anything like the same fatality levels as before. But I am increasingly thinking that the second half of 2021 might not be as bright as many of us had been beginning to hope. Maybe many of our companies will enjoy an H2 rebound to bring them back in line with 2019, but I’m not so sure. We’re not out of the woods yet, and I still see plenty of risk.

On top of the direct Covid risk, the spectre of inflation is looming again. And that puts the Bank of England in a difficult position. A rise in interest rates to combat inflation could stifle any economic recovery. And we really don’t know whether we face just a short-term blip, or something longer term.

Long-term optimism

But despite saying all of this, I’m still generally optimistic. The FTSE 100 might have a wobbly 2021. But I think the chances of an all-out slump now are very low. After all, we know far more about Covid than we did, and have a much better idea of how to handle it.

So I’ll just carry on investing in shares. I will, however, stick to companies with solid balance sheets in the FTSE 100. Companies with big debts, and those that needed to raise fresh capital during the crisis, could be a lot riskier. I’ll leave those until we’re really out of it.

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Views expressed 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.

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