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Is the FTSE 100 heading back to record highs – or another crash?

Roland Head
·3-min read
Scene depicting the City of London, home of the FTSE 100
Scene depicting the City of London, home of the FTSE 100

November has been an exciting month for stock market investors. The FTSE 100 is up by nearly 15% in two weeks. Hopes are high that Pfizer‘s Covid-19 vaccine will help the world return to normal.

Is the worst now over for stock market investors? Or is this new surge just another example of the manic mood swings of Mr Market? Today I want to explain how I see the situation — and what I think will happen next.

Look beyond the headlines

When times are tough, it’s natural to focus on the short term and forget about the future. This is often reflected in sharp and unpredictable movements in the stock market.

This year has been a great example of this. Look how the FTSE 100 has moved around over the last 10 months:

2020 FTSE 100 highs/lows

% change

2 January: 7,604

n/a

23 March: 4,993

-34%

5 June: 6,484

+30%

29 October: 5,581

-14%

13 November: c.6,300

+13%

The value of the FTSE 100 has been swinging around wildly. But what about the companies that make up the index?

I don’t think it’s realistic to suggest that the values of big FTSE 100 companies such as BP, Tesco, Unilever, and Diageo have changed so much this year.

What has changed is investor sentiment about the future. In the summer, cases were falling, and most global lockdowns eased. For a while, investors ignored the likelihood that a second wave would come during the autumn.

When rising Covid-19 case numbers could no longer be ignored, gloom returned to the market.

Now the Pfizer vaccine seems likely to be more effective than expected and available quite quickly, sentiment has improved again. The stock market has returned to levels last seen during the summer break.

What will happen next?

In a bullish scenario, everything could be rosy from now on. The UK government says it already has 40m doses of the Pfizer vaccine on order (enough for 20m people). The latest ONS data suggest that coronavirus infection rates may already be easing across the UK. By next summer, the global economy could be motoring.

Or not. I’m not quite that optimistic. I think what’s more likely is that the pattern we’ve seen this year will repeat. I expect the market to continue switching between hope and fear as the economic damage from the pandemic becomes clear.

Should I keep buying the FTSE 100?

I think we could see the FTSE 100 dip below 6,000 again. But I don’t expect to see another severe crash such as we saw in March.

However, I don’t think the market will be setting new records anytime soon. I suspect that over the next couple of years, the global economy will be sluggish, limiting stock market gains.

I don’t know how long it will take for the FTSE 100 to return to the 7,000+ level we first saw in December 2016. But I do know that in the past, major stock market crashes have been a good buying opportunity for investors with a 5–10-year view. I think this time will be the same.

I plan to continue drip-feeding cash into my Stocks and Shares ISA every month, as I’ve been doing throughout the stock market crash.

The post Is the FTSE 100 heading back to record highs – or another crash? appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo, Tesco, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020