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Where next for the FTSE 100 after it hits a 20-month high?

The FTSE 100 index reached a 20-month high yesterday, closing 0.76% higher to finish at 7,277.62. But blue-chip optimism is tempered by worries of rising inflation, higher taxes, and an unresolved labour crisis.

The FTSE 100 is a share index comprised of the 100 highest market cap companies on the London Stock Exchange. After reaching 7,674.56 on 17 January 2020, the onset of the pandemic saw the index sink to 5,190.78 by 20 March 2020.

It then rose to 6,484.30 on 5 June 2020, before falling to 5,577.27 by 30 October 2020. Over the past year, it’s climbed to its current price of 7,277.62. But while this is its highest point since February 2020, it’s still around 450 points down from its pre-pandemic heights. On the other hand, it’s over 200 points higher than its five-year average of 7,040.73.

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FTSE 100 optimism

Over the past month, the index has been supported by rising bank, mining, and energy share prices. HSBC’s Q3 results saw profits rise 74% year-over-year, while Barclays doubled it profits to £2 billion. And if interest rates increase, bank stocks will see further huge rises. HSBC alone expects an additional $500 million revenue if the UK base rate rises by just 0.25%.

Yesterday, Reckitt Benckiser's share price leapt 6% as raised its full-year forecast as it forecast rising sales with the resurgence of winter viruses. Whitbread reported a smaller half-year loss than was expected while predicting a recovery in 2022 to pre-pandemic levels. And travel stocks IAG and easyJet rose 2% and 5% respectively in the past week, as fears of a new winter lockdown subside.

Meanwhile, Brent crude has risen to a multi-year high of over $80 per barrel, as the global economic recovery causes oil demand to stay higher than supply can keep up. BlackRock CEO Larry Fink believes there is a ‘high possibility’ that it could spike to $100, as demand from the USA stays high.

This has led to rising oil company share prices. BP rose 7% over the past month, while Royal Dutch Shell is up 10%. And increased demand has also seen miners send the FTSE 100 higher. Glencore is up 7%, BHP 3%, and Anglo American 7% since September.
But while the rapid global economic recovery is welcomed, the pressure on commodity prices could lead to falling profitability across the wider FTSE 100 as increased costs eat into profit margins.

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Potential correction for the FTSE 100

For the moment, FTSE 100 companies seem to be recovering from their pandemic lows. 80% of UK adults are now fully vaccinated against coronavirus. And last week, PM Boris Johnson said a fresh lockdown is ‘not on the cards.’ So, while the pandemic is not over, many analysts believe the worst is behind us.

However, the high inflationary environment is creating a cost of living crisis. Energy bills, food and petrol are all approaching multi-year highs. And from April 2022, National Insurance, and council tax rises, are going to put pressure on consumer disposable income, while increased interest rates makes debt more expensive. Many FTSE 100 companies could see revenues fall soon.

There’s also a global supply chain crisis as the UK heads into the highly important Christmas trading period. Meanwhile, a constricted labour market is sending wages higher, while corporation tax is rising from 19% to 25% next year. At the same time, government stimulus programs are being turned off. And with the Cop 26 environmental summit kicking off on Sunday, share prices of high performing energy and mining stocks could be hit by new environmental targets.

But the big question is how central banks will respond to high inflation during this period of tentative growth. If interest rates rise too fast, growth will be stifled. Too slow, and consumer demand could collapse. Just right, and the FTSE 100 could rise even higher.

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