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FTSE100 hits 12-month high: Why it’s up. Why it matters. And what to do about it.

Simon English
·3-min read
 (REUTERS)
(REUTERS)

The stock market is on the up, I notice..

Very much so. Today the FTSE 100 sped past 6900 – it could top 7000 any day. In some ways 7000 is just a number, it doesn’t mean that much of itself. But it signifies optimism, a sense that most things are going our way.

Some are even talking about it hitting an all-time high this year. That’s a bold call given that the high reached on 22 May 2018 was 7903 – another 1000 points from where we are now.

The market is already up about 1300 points since last October, a rise worth £325 billion.

How do you get to that figure?

A 100-point rise in the FTSE 100 is about £25 billion of added on shareholder value. You usually read about value being “wiped off” the stock market, a terrible cliché that isn’t even really accurate since over time it always gets wiped back on.

The FTSE 250 is already at a record high.

Laith Khalaf, financial analyst at AJ Bell, said: “The fact an index hits a record high is not itself a buying signal, but the attraction of investing in medium-sized companies are plain to see in the long-term performance figures.

“Over twenty years, the FTSE 250 has wiped the floor with the big blue chips of the FTSE 100, and indeed those of the much-vaunted [US] S&P 500, which has found itself in so much favour with investors of late. Indeed, the FTSE 250 has been the best performing segment of the main UK market since the turn of the century.”

What’s driving the recent rally?

If you had to pick one word, it would be this: vaccines. But there is more to it than that.

There is a feeling that much Brexit uncertainty is either clearing or will be manageable.

And that the official forecasts are underestimating just how strong the economic bounce back, starting next Monday perhaps, will be.

In the US, the UK and the Eurozone governments are mostly relaxed about very high deficits – they aren’t yet worried about debt, so they are going to keep spending for the foreseeable future.

America in particular offers optimism, since President Joe Biden plans to spend $2 trillion on a stimulus package. Quite a few big UK companies are exposed to that situation.

Today, US stocks opened at a new record high, with the S&P 500 up 10 points at 4091.

The European Central Bank said today that 2020 economic recovery is already “faster than expected” and the Biden plan represents an “upside risk” – by which they mean a risk to their own forecasts.

In the UK, figures just out show the construction sector booming.

What is the risk to the recovery/markets?

A mutant strain of Covid-19 that fends off the vaccines is the main one. The expected consumer boom post lockdown suddenly being weaker than predicted wouldn’t help either.

Who is gaining from the rise in the market?

Mostly big institutions, large investors. But a new breed of younger, private investor emerged during lockdown. The Financial Conduct Authority is lately worried that they don’t understand the risks they are taking.

One unknown factor is whether they will be scared away by a serious market wobble, or if they are here for good.

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