The FTSE 100 index reached a record high last week following Donald Trump’s inauguration – but what does that mean for you if you already own shares or if you’re thinking of investing?
Despite concerns surrounding some of Trump’s policies, including the introduction of tariffs on imported goods, the FTSE 100 index, which is the index of the UK’s 100 biggest companies, climbed to 8,521 on Monday and then reached 8,565 on Thursday, subsequently hovering around this level.
Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: “Investors are batting away concerns about the impact of President Trump’s policies on the global economy. The make up of the FTSE 100 also offers resilience in an uncertain world, with pharma, consumer staples, and utility stocks offering the prospect of stable returns whatever the economic weather.
“Although Chinese stocks fell back after POTUS pledged to hit China with an extra 10% tariff on goods imported into the US, there are hopes a tit-for-tat retaliation won’t materialise. Speaking in Davos, China’s Vice Premier Ding Xuexiang cautioned that there were no winners in a trade war, so there are hopes that repercussions may be more limited. The delay in imposing blanket tariffs on Day 1 of the new administration has led to hopes that there is room for negotiations.”
Here, we look at why the FTSE 100 index reached a record high last week, and what impact this could have on your finances.
Why did the FTSE 100 reach a record high?
There are several reasons why the FTSE 100 reached a record high last week. Part of the reason is that the pound has fallen against the dollar, but it’s not the only reason.
- The FTSE 100 has a number of large oil companies and mining companies, which earn most of their revenue in dollars. The pound has fallen against the dollar due to worries that debt levels in the UK may be unsustainable. The cost of government borrowing has also risen due to these worries. The strong dollar has added to sterling’s woes, with investors turning to the greenback to protect themselves from uncertainty in the UK.
- Donald Trump’s inauguration has boosted mining and oil companies (because of his outlook on energy and climate change). The fact that he has also said he’s keen to spend on infrastructure means other companies, such as those involved in construction, are also more optimistic.
- Rising inflation makes investing in shares more attractive than in some other assets. Although inflation is currently at relatively low levels in the UK, there are indications that inflation could remain above the government’s 2% target for a while yet.
What does the high value of the FTSE mean for me?
If you have already invested:
If you’re already invested in something like stocks and shares ISAs or have a stock market linked pension, the rise in the FTSE 100 index should be good news for your investments. However, it’s the long term performance of any investment that matters, not short term ups and downs.
Also, it will depend on where you have invested your money (for example in the UK or largely overseas). That’s because the stock market index in that country may have risen by more or less than the FTSE 100.
It’s important not to get too carried away with the recent run of good form. Over such a short time frame it’s best to take stock market movements with a pinch of salt, whether they are good or bad.
If you haven’t yet invested:
Don’t be tempted to invest ‘because’ the stock market is high. For some reason, a rising FTSE index often results in people piling money into share-based investments. But you wouldn’t buy a dress, washing machine or computer just because it was more expensive now than a few months ago, would you?
You should only invest if you are comfortable with the risks and can leave your money invested for at least five years, but preferably longer.
Will it affect my pension?
Unless you’ve specified that you want your pension savings to be invested in a particular fund or funds, you’re likely to find that your contributions have been automatically invested into a ‘default fund’. You can find out more about how default funds work in our guide Where is my pension invested?
The default fund typically uses what is known as ‘lifestyling’ which means your pension investments automatically change as you approach retirement. When you’re a long way off retirement, for example, your money will go into a fund invested in a broad mix of investments, but predominantly stocks and shares, with the aim of growing your pension pot. Most people with a UK pension will have exposure to UK equities which means if the FTSE 100 goes up in value so does the value of their pension.
However, your pension will usually have exposure to a wide range of other companies in the US and elsewhere, as well as to other assets such as bonds, property and cash, so although a higher FTSE is undoubtedly positive news, it’s unlikely to mean you can start planning for early retirement just yet.
Bear in mind too that your pension is a long-term investment and shares can fall just as quickly as they can rise, so it’s important not to get too carried away by periods of positive – or negative growth. Find out more about stock market volatility in our article Four ways to weather stock market storms and about investing in our guide Is investing right for you?
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
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