Key Points
- The FTSE 100 hit the highest levels in almost two years last week
- The index still has some room to move higher before reaching its all-time highs of just under 7,900
- Fundamentally, the UK economy could support further gains this year, but there are risks
Last week, the FTSE 100 made fresh highs by breaking above 7,550 points during Thursday and Friday trading and it has started Monday strongly too. The last time we were trading at these levels was back in January 2020, just as the wobble around Covid-19 started. Given that this ground has now been fully recovered, it does spark a valid question. As we’re only in January, how high could the FTSE 100 go this year?
Considering the charts
Before I get to the fundamentals, it’s worth taking a look at the historical performance of the FTSE 100. Past performance doesn’t guarantee future returns. But it can give me an indication of the relative value of the index as we stand.
The FTSE 100 has made back all of the ground lost during the stock market crash in March 2020. If I take a look at the couple of years prior to that, I note that the index has room to move higher still. Back in May 2018, it reached 7,877 points. Even during 2019, the FTSE 100 traded above 7,600 and 7,700 during periods of the year.
This shows me that the FTSE 100 isn’t forging new ground at present. Unlike some of the US stock markets that are around all-time highs, the FTSE 100 doesn’t strike me as being overbought at the moment. Given the past track record, I think the index can run up to 7,800 or even 7,900 points before alarm bells might start to ring about it being overvalued.
FTSE 100 fundamentals
Considering charts from the past can only teach me so much. The other important consideration is the fundamental value of the companies within the index.
I’ve read through countless updates from businesses in Footsie releasing their Q3 or Q4 results. Some are still struggling, but I’ve been surprised by the amount of firms that are now putting out results that are better than 2019. Or if results aren’t quite beating pre-pandemic levels, they’re certainly up significantly from 2020.
We also have the situation that no lockdowns have been implemented in the UK since the New Year. I really thought we would have a short lockdown given the rise of Omicron. Yet the fact that the Government isn’t keen on adding restrictions is good news for FTSE 100 stocks. It allows operations in the UK to be unhindered. The positive sentiment should also help consumers to feel more confident in going about their daily live and making purchases.
If this continues, then I don’t see why the FTSE 100 can’t post gains in 2022. Adding another 5% from current levels would post all-time highs, which I think is the first point of call for the index. Beyond this, the 8,000 point level would be a landmark to conquer for bullish investors.
There are risks to my overall view. Clearly, 2022 still has a lot of unknowns. These include new variants, a China slowdown, political unrest in the UK and tensions with Russia. All of these could derail potential FTSE 100 gains, and I need to be aware of this.
Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. 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.
