A couple of months ago, I wrote an article titled “Can the FTSE 250 index cross 23,000 now?”, going by the index’s consistent gains. My verdict was, that it would sooner rather than later. That is exactly what has happened. Not only did it cross 23,000 late last month, it has consistently stayed above it through August so far. As of today, the FTSE 250 index is averaging just a little above 23,500. Barring a sudden stock market meltdown, it also appears well on its way to average above 23,000 for the first time ever.
This brings me to the next obvious question. And that is, can the FTSE 250 index keep rising? I think there is a good chance that it can.
Why the FTSE 250 index can rise more
The domestically focused index stands to gain from a bounce back in the UK economy. With more than 75% of UK’s adults now vaccinated and an over 22% growth seen in the April-June quarter over the same quarter last year, it is clear that the building blocks for a FTSE 250 increase are already there.
The index also has plenty of momentum already. It has grown month-on-month for the last 11 months. And going by the latest updates of the largest FTSE 250 companies by market capitalisation after the FTSE 100, it appears clear that things are looking good for a number of them.
Consider the biggest three by market capitalisation, keeping aside aero subsystem manufacturer Meggitt and supermarket Morrisons, both of which are up for acquisition. These include Wizz Air, which is the most obvious of reopening stocks. Others like Dechra Pharmaceuticals and Howden Joinery have reported good progress too.
Importantly, the UK stock markets have shed the years of uncertainty brought on by the Brexit vote. It is too bad that the deal was signed just before the corona-crisis started and as a result its full impact was not felt either on the stock markets or the economy. But I do believe that it has been instrumental in the FTSE 250’s consistent increase over the past year.
What can go wrong
That said, there are some recent developments that could derail the progress. Inflation is a big one that companies have talked about in recent months. Some of them have even started passing on costs to end consumers, which could fuel inflation further. While the Bank of England has refrained from hiking interest rates in a still recovering economy, if inflation continues to stay above its comfort level of 2%, it could be forced to do so.
Also, I am still slightly uncomfortable with where we are at with the pandemic. Coronavirus has mutated successfully so far. And despite the speedy vaccination drive and our having come a long way since the pandemic was at its peak, the latest numbers continue to look disturbing.
My takeaway
On the whole, though, I am hopeful. Policy makers still believe that inflation is transitory and vaccine booster shots may stave off another public health crisis. In the meantime, the economy looks strong as does investor sentiment. I think the question now is, Can the FTSE 250 index cross 24,000?