In the last month the FTSE 100 has risen by 4.5%. Were it to continue this rate of growth over the next eleven months it would equate to a rise of 70% within a year. While unlikely, this serves to show just how sudden and how strong the recent shift in sentiment has been. The question is, can it continue?
As ever, the FTSE 100 faces a number of risks as well as multiple opportunities. On the one hand, the bulls have the gradual improvement in outlook for the US and European economies to be positive about. The US continues to post excellent GDP, jobs and consumer goods numbers and there is a clear upward trend regarding its economic data, which is a key reason why the Federal Reserve is contemplating a rate rise in the months ahead.
Similarly, the Eurozone economy is also making improvements of its own. Under Mario Draghi, the ECB has gradually shifted its strategy away from one which is hugely concerned about inflation to one which is equally worried about the prospect of deflation and a lack of growth. As such, the ECB is now willing to utilise quantitative easing on a large scale which should improve the GDP outlook for the region.
Meanwhile, the UK economy is also in relatively good shape. Employment is high, there is a clear path to running a budget surplus and consumer demand is gaining a boost from lower commodity prices and rising wages. As such, and while the FTSE 100 is not exactly dominated by UK-focused companies, the outlook for the index’s ‘local economy’ remains upbeat. Together with a bright future for the Eurozone and the US, this means that company earnings are likely to rise and allow investors to demand higher valuations moving forward.
However, there are risks to the FTSE 100’s future progress, with the bears being concerned about the continued slowdown in China. As today’s GDP release shows, the world’s second-largest economy continues to experience a soft landing and, realistically, it would be unsurprising if this situation continued into 2016 and beyond. And, with interest rate rises being very likely in the next couple of years, a tightening of monetary policy could cause investor sentiment to wane after historically low interest rates on both sides of the Atlantic have become the norm.
The impact of a Chinese slowdown, though, may not be so negative on the FTSE 100. After all, the Federal Reserve apparently held off raising rates at its latest meeting due to concerns surrounding the performance of China. So, if China’s GDP growth rate does slow, then interest rate rises may also be slower than they otherwise would be and this could have a positive impact on investor sentiment and, consequently, the FTSE 100.
Of course, the rise in the FTSE 100 over the last month is almost certain to not be repeated in each of the next eleven months. History shows that stock markets rarely enjoy uninterrupted gains over a sustained period.