The FTSE 100 — the UK stock market’s main index — is having a pretty good 2021. As I write, it stands at 7,310.75 points, up 0.4% since Thursday. What’s more, the Footsie hit its 2021 high earlier, peaking at 7,331.25 points at 11.15am. After a good run since October 2020, has the index gone too far? Or should I keep buying cheap FTSE 100 shares?
FTSE 100’s 2020/21 highs and lows
At end-2018, the FTSE 100 closed at 6,728.13 points. It then rose nearly 815 points to close 2019 at 7,542.44. That was a gain of 10.8% in 2019 (excluding dividends). But then along came Covid-19 to send global stock markets crashing. At its 2020 low on ‘Meltdown Monday’ (23 March 2020), the Footsie collapsed to a low of 4,922.76 points, before recovering slightly to close at 4,993.89.
The index then rebounded, rising steeply after ‘Vaccine Monday’ (9 November 2020) and ending 2020 at 6,460.52. Even so, the FTSE 100 lost over 1,080 points during 2020 (-14.3%). Fortunately, the UK stock market has continued its ascent this year. So far in 2021, the Footsie has added around 850 points (+13.2%). And yet it still lies roughly 230 points (-3.1%) below its 2019 close. Ho hum.
The Bank of England bottles it on rates
One reason for the FTSE 100’s rise this week may be surprise news from the Bank of England. On Tuesday, the Bank of England’s Monetary Policy Committee (MPC) voted 7-2 to keep the Bank’s base rate at a low of 0.1% a year. Rate derivatives had been pricing in at least a 0.15 percentage-point rise by the MPC. Hence, this came as a shock to markets when announced yesterday. Although inflation has shot well beyond the Bank’s target of 2% a year, the MPC is worried about jobs growth. Hence, it chose to keep rates on hold this month, though it expects the base rate to hit 1% by the end of 2022.
The MPC predicts that UK economic growth is slowing. This is partly due to disruption in supply chains, labour shortages, and weaker UK consumption demand. It expects UK Gross Domestic Product (GDP) to have climbed 1.2% in Q3 2021, slightly weaker than previously expected. Also, the MPC is worrying about soaring energy prices, although it expects these to moderate in 2022. And it expect the UK unemployment rate to rise in Q4 from its current level of 4.5%. Indeed, more than a million jobs may have have been furloughed before the Coronavirus Job Retention Scheme closed at end-September.
I’ll keep buying FTSE 100 stocks
The bad news for UK consumers is that the MPC expects Consumer Price Index (CPI) inflation to keep on rising. CPI inflation was 3.1% in September, but is forecast to have hit almost 4% in October. The MPC then expects inflation to climb to 4.5% in November and remain at that level throughout the winter. It expects this measure to peak at 5% in April 2022 (even higher than previously forecast).
Higher inflation is bad news for UK consumers because it reduces the spending power of our incomes. So we may have to tighten our belts and rein in our spending for a while. But I don’t see this as being particularly bad new for FTSE 100 companies. That’s because around three-quarters of Footsie earnings come from overseas, rather than the UK. Also, the index’s dividend yield of around 4% a year looks rather tempting to me. Hence, I will keep buying cheap and high-yielding FTSE 100 stocks for now, whatever happens to interest rates!