The FTSE 100 set another new record high today, continuing its rally in 2023. The UK’s blue-chip share index has now gained 7% so far this year, as global markets have been lifted by hope that inflation — and therefore aggressive interest rate increases — may have peaked.
How am I responding to this? Well, with a slight shrug of the shoulders, to be honest. Let me explain.
The big picture
The whole purpose of me regularly investing my savings in the stock market is to grow my wealth over time. That’s based on my expectation that major indexes will rise steadily across the years.
Despite conflicts, pandemics, recessions, and every sort of crisis imaginable, the market does tend to keep rising over the long term. So should I really be surprised that the market is doing what it has always done? I don’t think so.
The United Nations projects that the global population will reach 9.7bn people in 2050, up from around 8bn today. A higher global population typically means a larger addressable market for quality companies. And businesses that successfully innovate and sell to a growing market become more valuable over time.
Global economic growth will likely continue long term. Markets should rise in response.
Nuance
Of course, I’m taking a big picture view here. There’s more nuance.
Take Japan, for example. In 1991, the country entered a period of economic stagnation referred to as the ‘Lost Decade’. This has essentially lasted for three decades though, during which time Japan’s stock index — the Nikkei 225 — has barely gone higher.
But the FTSE 100 obviously doesn’t reflect Japan’s economy. The very large firms in the Footsie — such as Shell, BP, Anglo American, Diageo, and HSBC — are on the whole internationally-focused. They derive around 80% of their earnings from nearly every corner of the globe.
One consequence of this is that the FTSE 100 tends to do well when sterling falls. That’s because a large proportion of the index constituents’ overseas revenue is denominated in US dollars, and the greenback is the strongest it’s been in around two decades.
Forward looking
So when the FTSE 100 performs strongly, it’s more likely to reflect the market’s view of where it anticipates the world economy is heading. And the prospects for this have been boosted by the recent reopening of China’s economy from Covid restrictions.
This will not only accelerate China’s economic recovery, but it will also boost global economic growth, according to Goldman Sachs Research.
Even the UK economy is now expected to avoid the worst predictions. But after months of dire headlines about the longest UK recession in a century, the commentary has now turned cautiously optimistic.
This has been reflected in the more domestic-focused FTSE 250, which is up 6% since the turn of the year. That’s not to say things couldn’t get worse. But the mood music in the market seems to have changed.
Given such a backdrop, it wouldn’t surprise me if the FTSE 100 moved briskly above the 8,000 mark this week. Were this to happen, I’m sure it would be met with lots of media fanfare.
But it won’t influence my portfolio. I invest for the long term, regardless of headlines and symbolic milestones.
