The FTSE 100 this week hit its highest levels since before the global financial crisis, rising above 6,300 for the first time since May 2008.
The UK’s flagship index has had its best start to a calendar year since 1989, climbing over 6% since 2 January 2013.
Why has the FTSE 100 stock market rallied?
With the UK economy still in the doldrums – amid confirmation that we saw no growth in 2012 and fears of an unprecedented triple-dip recession – it might seem strange to some that traders are apparently so optimistic.
But this would be to miss a crucial distinction between how shares are valued and the wider economy.
The stock market is essentially a way to value the future prospects of companies. Those buying shares are taking a position on the future profitability of businesses and many blue-chips are in rude financial health, despite the wider economic gloom.
Moreover, most FTSE 100 companies are global brands with worldwide profits – the index is less representative of the UK economy than it used to be.
The wider context is that fears over the state of the Eurozone, the US fiscal cliff and reduced growth in China have somewhat dissipated.
FTSE 100 rally – what this means for investors
There is bad news for anyone who has been sitting on cash, waiting to catch the rebound in stock markets following the financial crisis – the market is up over 70% since it hit its low point in March 2009. The rebound has happened. The interesting question now is where markets will go from here.
Some will speculate that the rally is overdone; that we are due a correction. As Warren Buffet advises: ‘Be greedy when others are fearful and fearful when others are greedy.’
There is arguably a lot of greed in the market at present. When everyone seems bullish, including the mainstream press, it often pays to be wary. Of course, the rally could have much more life in it yet.
But most private investors will not spend their time trying to second guess the markets. Which? has always suggested an approach based on keeping costs low and diversifying your assets.
If you fear a correction, now might be a time to take some profits, but investors with diverse portfolios and a long-term strategy based on their attitude to risk can be more confident about the future.