The FTSE 100 index is currently trading around 7,050 points. This marks a significant increase from levels around 5,800 seen last September. Yet the market pushed above 7,000 in early spring and hasn’t really been able to make sizeable gains since then. For the past three months, the index has been in a range around 6,800-7,200 points. As we now head into the final quarter of the year, will the FTSE 100 finish higher or lower than 7,000 points?
Covid-19 impacting the FTSE 100
Unsurprisingly, I think the biggest factor in determining where the FTSE 100 will finish this year is Covid-19. Heading into last winter we saw case numbers and deaths rise. This led to tighter restrictions at Christmas.
The picture is different this time, despite persistently high case rates, as most people in the UK are now vaccinated. Yet it’s unproven how much protection the vaccine offers over time, or whether a new variant will render it redundant. If we do see some restrictions imposed as we go into December, I think the FTSE 100 could take this badly. The implications for economic growth during this period are dire and we could see profit warnings from sectors that rely heavily on festive trading.
As a result, if we do see Covid-19 issues flaring up in Q4, I think the FTSE 100 could finish below 7,000 points. But if things are managed well and companies can operate without disruption, I think the market could move higher.
UK monetary policy
Another point that I think will come into the spotlight is the monetary policy choices of the Bank of England. With the August inflation number coming in above expectations at 3.2% year-on-year, pressure is building to raise interest rates.
The central bank met yesterday and was quite hawkish, in my opinion. The committee commented that modest tightening of monetary policy was likely to be necessary in order to meet the inflation target (2%). This could be via reducing the amount of assets the bank purchases each month, or via interest rate hikes.
If the next inflation number is high, then I could see the bank looking to make some kind of move towards the end of the year. Expectations of this happening would likely pull the FTSE 100 lower. Higher rates make it more expensive for companies to refinance or issue more debt.
Supply chain problems
Another factor is the supply chain issues in the UK. In recent weeks it’s become apparent that a shortage of HGV drivers is causing problems for businesses from a variety of different sectors.
Looking forward, supply chain disruption in the key end-of-year trading period could hurt the share prices of some FTSE 100 companies. These include supermarkets and other retailers.
For the moment it appears that supply chain disruption is manageable, but if things deteriorate further, this could become a much larger issue. On the other hand, if this story passes and doesn’t have a meaningful impact, the FTSE 100 shouldn’t be massively hindered.
Overall, I think there is a higher chance of the market finishing above 7,000 points than below it. I see Covid-19 as the major risk, but at the same time none of the three issues raised have caused the FTSE 100 to crash hard over the past few months. As a result, I’ll stock with my usual investing strategy for long-term gains.
