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The UK economy is not in a good place right now. Although we are not yet in a technical recession, we are predicted to last this year. High inflation and lack of economic growth lead to stagflation, which is undesirable. But despite all this, the UK stock market continues to thrive. At FTSE 100 up 17% since mid-October, and is only a few points away from hitting an all-time high. Why is this?
Peak inflation
The latest figures for inflation this morning show that it is still very high, but moving lower. The December number was 10.5%, lower than the 10.7% in November and the highest 11.1% in October.
It still is manner too early to celebrate, but investors like to try and think ahead. If we have seen inflation peak, this could be good news for stocks later this year if it continues to decline. On this basis, reducing the cost pressure for the company can increase the profit.
Interest rates are near high
Lower inflation figures also eased pressure on the Bank of England to aggressively raise interest rates. It appears that the central bank will continue to raise another 0.5% in February. However, we may be nearing the end of the rate hike cycle.
Again, this is positive for the stock market. This helps reduce the impact of new debt on businesses. I think some have been factoring in the central bank will be done with interest rate movements at the end of spring and buy stocks now ahead of the potential pivot point.
Better risk sentiment
When I talk about risk sentiment, I’m referring to how confident people like me feel about buying stocks. If my risk sentiment is positive, I will buy the stock. The opposite is true if I feel negative sentiment.
Although it is sometimes difficult to determine the reason why sentiment in the market changes, it can happen very quickly. This has indeed helped the FTSE 100 and other UK assets to appreciate in value over the past few months. Some refer to Santa’s rally in December, or the January bump when everyone starts the year. Either way, it helps drive the market higher.
The global nature of the stock market
In the FTSE 100, most stocks are global in nature. This means they sell worldwide and have operations in many countries.
Recently, we have seen positive developments that have helped the company. For example, China has reopened its borders and eased restrictions. This makes it easier for manufacturers in the country to increase production and ship goods faster.
With events like this being recorded in various places, the constituents of the UK stock market benefit, despite the good things happening outside the UK.
Directions from here
The main risk for the FTSE 100 from breaking higher to 8,000 points remains the state of the economy. I still feel it is incredibly broken. Energy bills remain very high and inflation above 10% cannot be ignored.
I feel that I can take advantage of this boost, but in a careful way, by drip-feeding money into the stock market on a regular basis.
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