Since the start of 2023, the FTSE 100 has risen by 7%. Yesterday, it reached 8,000 for the first time. I think the index will continue inexorably towards 9,000 and beyond. These are the reasons for my optimism.
With 80% of the sales of companies in the FTSE 100 generated overseas, the performance of the index doesn’t always match that of the UK economy. For example, in 2009 the index increased by 22% despite Gross Domestic Product shrinking by 4.5%. However, if the UK economy is growing, disposable incomes are increasing, and this means people have more money to invest. Also, investors generally feel more optimistic, and sentiment plays a big part in determining stock market trends.
Earlier this month, the Bank of England released its regular survey of independent economic forecasts. The average expectation is for the UK economy to grow by 0.1% in 2023, 1.6% in 2024 and 1.9% in 2025. Although unspectacular, the expected growth beyond this year is broadly in line with historical levels.
The UK is probably heading for a recession, but it seems as though it will be a relatively short and shallow one.
2. The past
History also suggests that a rally will continue.
The FTSE 100 was launched in January 1984, with a starting value of 1,000. The table below identifies how long the index has taken to increase in increments of 1,000. Over a sustained period it has grown significantly, albeit at very different rates.
|Index value||Month reached||Period (months)|
There have been many dips along the way. Older investors will remember the events of October 1987, when the index crashed 18% in just six trading days!
And, of course, there are no guarantees that the stock market will continue to rise. The past is not necessarily a good guide to the future. However, I’m optimistic that the historical trend will continue.
Each company in the FTSE 100 is assigned a weighting based on its market cap.
Larger companies therefore have more of an impact than smaller ones. At the end of 2022, AstraZeneca was the UK’s most valuable company, and accounted for 8.63% of the movement in the index.
Looking at the five largest companies, it’s easy to see why the FTSE 100 has risen over the past year despite the gloomy economic backdrop. Each has increased by an average of 16.9%, and their share prices contribute 32.6% of the total movement. The stocks of the 10 largest companies account for just over half of the index.
|Stock||Weighting (%) at the end of 2022||Last 12 months’ share price performance (%)|
There are no obvious reasons why the share prices of these companies will fall significantly in the coming months. The recent easing of oil and gas prices may affect BP and Shell, but all are global companies with popular brands and products.
There are also many companies whose stocks didn’t do well in 2022, but that should perform better in 2023 and beyond.
All of this evidence points to 2023 being a good year for the FTSE 100.
I’m confident that it will break the 9,000 barrier — I’m just not sure when. It may take several years, and there will be bumps along the way. But by taking a long term view I think there’s money to be made.
The post The FTSE 100 has just reached 8,000! When will it hit 9,000? appeared first on The Motley Fool UK.
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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Unilever Plc. 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.