At the moment, the FTSE 100 index is trading at 7,340 points. Back in November, the index made new highs for the year by almost breaking above 7,400 points. Yet when I consider the events of the past few weeks, does it really make sense that the market should be trading this high given the news around Omicron and the potential impact?
Weaker currency helps to boost stocks
There are various different points to consider when trying to understand why the FTSE 100 moves the way it does. It’s not just as simple as saying that bad news should make the index fall. For example, I need to consider the impact of factors like the British Pound.
The pound has fallen in value over the past few weeks, recording lows for the year against currencies such as the US Dollar. The FTSE 100 index is weighted heavily towards exporters. Therefore, when the pound depreciates in value, this actually causes the share prices for exporters to rise. This is because exporters receive payments in foreign currency, such as US Dollars. They then have to buy pounds as they will report their UK accounts in that currency. So if the pound has become cheaper in value, this benefits the FTSE 100 stocks.
As a result, even with worries around the new virus variant, a cheaper pound is one factor why the FTSE 100 as a whole is actually doing well.
Fast-moving sentiment
Another point that I need to be aware of is investor sentiment. It’s true that when the news first broke of concerns around Omicron, the FTSE 100 fell sharply. I could argue that the market accurately reflects the current situation, given the information we currently have.
The stock market is a forward-looking economic indicator. This means that the price should reflect the current view of the world now and in the future. As the FTSE 100 has bounced back from the wobble, it indicates to me that the bulk of investors see the future more positive than negative. If they thought things will get worse, the stock market would be trading lower.
Clearly, this can change quickly and is something I need to keep a close eye on.
Finding value in the FTSE 100 now
Even though the FTSE 100 is back near the highs of the year, I don’t think that the market is overvalued. It’s still several hundred points away from the all-time high registered back in May 2019. This is in contrast to markets in the US that have closed at all-time highs many times in 2021.
So I do see value in investing in good stocks now for the long term. I’m concerned about what lies ahead with restrictions over the winter. However, I can negate some of this risk by investing in defensive stocks. I can also look at different ways to protect my portfolio against a stock market crash.
Ultimately, I feel that the FTSE 100 can offer me good investment options even with the market close to highs.
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Jon Smith and The Motley Fool UK have no position in any share 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.
