Despite concerns the UK will face a recession in 2023, the FTSE 100 hit a record high in February. Read on to find out what influenced the market and the valuable lesson investors can take from the news.
The FTSE 100 is an index comprised of the 100 largest companies listed on the London Stock Exchange. On 3 February 2023, the index hit a new high of 7,906.39 and exceeded a record set almost four years ago in May 2018. Just days later the FTSE 100 surpassed the magic 8,000 barrier, setting another new record.
After a difficult few years, due to the Covid-19 pandemic and war in Ukraine, it was good news for investors.
But the timing may seem a little strange. After all, pick up a newspaper and you’ll find stories about the cost of living crisis, high inflation, and the risk of the UK falling into a recession this year.
So, why did the FTSE 100 reach a high in February? There are several factors at play, including these three.
- Fears of a deep recession fell
Figures published by the government show the UK narrowly avoided a recession in 2022. While the economy contracted in December, it was offset by growth in the previous two months.
While the Bank of England (BoE) still predicts the UK will face a recession this year, it now forecasts a much shallower dip than it did in 2022. The organisation also expects inflation to “fall quickly” this year, which could ease pressure on households and businesses.
- The FTSE 100 is affected by global events
While the FTSE 100 is made up of the largest companies listed on the London Stock Exchange, it is influenced by global events.
The businesses included on the index aren’t focused solely on the UK. There are many multinational companies on the index, and others will derive their profits from around the world. So, woes in the UK don’t automatically mean the businesses will face challenges.
It highlights the importance of diversification in your investment portfolio. By holding a mix of assets, gains in some areas can potentially offset losses in others. You should consider investing in a range of businesses, in terms of geography and sector, to create a balanced portfolio.
- Many oil companies reported record profits
Companies announcing profits for 2022 affected markets at the start of the year, and many energy companies reported records. Both BP and Shell, which are listed on the FTSE 100, reported that their profits doubled.
While high energy prices are playing a role in the cost of living crisis and recession concerns, some investors are profiting. A gloomy outlook for the economy doesn’t necessarily mean investors can expect poor results from their portfolio.
Investor lesson: Trying to predict the markets could mean you miss out on growth
As an investor, it can be easy to be influenced by the news and forecasts. After all, if you read that the UK economy is on track for a deep and long recession this year, you may think the best course of action is to take your money out of investments to protect your wealth.
Yet, investors that were spooked by doom and gloom headlines at the start of the year could have missed out on the FTSE 100 reaching a record high.
You should keep in mind that accurately predicting the market consistently is impossible – there are too many unpredictable factors that influence it.
So, what is the alternative? Look at the bigger picture and have faith in your investment strategy.
Your investment portfolio will experience volatility at times and may fall in value. However, historically, investment markets have delivered returns over long time frames. When you’re reviewing your investment performance, focus on the years rather than weeks or months.
Over a longer time frame, the ups and downs of investments often smooth out. So, while the FTSE 100 may no longer be at a record high like it was in February, how has it performed over 5 or 10 years? You should view your investment portfolio in the same way.
Remember, investment performance cannot be guaranteed, and it’s important you invest in a way that reflects your risk profile. Even if an investment sounds tempting, it may not be right for your circumstances or goals.
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Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
