As I write, the FTSE 100 (INDEXFTSE: UKX) index stands at 7,102 but it has been as high as 7,129 today, which is a level above its all-time intra-day high of 7,122 points.
So as the FTSE 100 is breaking to a new high, the big question now is, should you buy, sell or hold shares?
What’s driving the FTSE 100?
One reason for the strength of Britain’s top share index is fresh weakness in sterling as measured against other currencies. The pound dropped below $1.23 in morning trade, revisiting lows previously seen during last week’s sterling flash crash.
Many of the big companies in the FTSE 100 have internationally-facing operations and earnings made in other currencies are worth more to British firms and their investors when converted back to pounds if the pound is weak. Bigger earnings lead to higher share prices, so a falling pound sterling tends to correlate with a rising FTSE 100.
Happy days for investors then, but former Bank of England Governor Lord Mervyn King reckons the plunge in the pound is a “welcome change” for the UK economy too. Recent fears about the behaviour of the pound are overblown, he says, even though sterling is at its lowest level against the US dollar since 1985. “The economy was slowing somewhat before the [Brexit] vote and we are in a position where the rest of the world is not offering us much help. So from that point of view, the fall in sterling is a welcome change,” he said in a Sky News interview.
Indeed, a weaker pound helps companies that sell goods abroad to be more competitive. In a low growth economic environment, countries tend to fall over themselves to devalue their currencies in order to boost economic activity. From that point of view, Britain’s vote to leave the EU has scored the UK an advantage.
Not the whole story
Currency fluctuations aren’t the whole story for the FTSE 100 though. Individual companies in different sectors make up the index and we need to look at other factors to get the full picture. For example, commodity producers are resurgent after hitting lows earlier in the year. Also, some UK-facing cyclical firms are coming back after plummeting in the immediate aftermath of the Brexit vote on fears of an imminent recession.
On top of that, there are longer-term drivers at play too. Dividend payments continue to make equities attractive when compared to low-yielding bonds and cash savings accounts. That situation is pushed along by the extraordinary monetary policy we see in play that has led to low interest rates and quantitative easing — both working to drive equities higher.
Where next for the index?
Richard Farleigh, in his book Taming The Lion, reckons new market highs tend to beget new market highs more often than they lead to sudden reversals. It’s also known that when the stock market is doing well it often attracts new investors into the game.
I think the macroeconomic environment is steady enough to support the index and several drivers could push it higher still, particularly as we move towards the end of the year.
