FTSE 100 hits record high but is it too soon for unbridled optimism?

Amid forecasts that the UK will avoid recession this year, the FTSE 100 briefly hit a record high of 7934.30 points this morning.

The National Institute of Economic and Social Research has predicted that the UK will avoid recession this year, but it will stagnate and millions will feel much poorer.

Susannah Streeter, Senior Investment and Markets Analyst at Hargreaves Lansdown, comments: “The tide of optimism washing over the London market is being pushed higher with the latest economic assessment judging that the UK could avoid a recession.

“The FTSE 100 has opened with another spring in its step, hitting a new high in early trade. The forecast from the National Institute of Economic and Social Research is more bullish than the Bank of England and the International Monetary Fund, suggesting that the economy will suffer a period of stagnation rather than back-to-back quarters of contraction.

“GDP data has already surprised on the upside and consumers and companies have largely been more resilient than expected. However, for millions of lower-income households, the chill on their finances will be very real in the months to come, even if the economy escapes a technical recession.

“With the average middle-income household set to see their personal disposable income fall by 13% over the next financial year, this does not bode well for companies highly reliant on discretionary spending. Piles of lockdown savings are being eroded, and consumers will be making some very tricky choices ahead, about where to spend available cash with some signs that budgets are being ringfenced for holidays and socialising, rather than buying stuff.

“The think tank is also flagging the continued risk that Britain’s productivity will stay sluggish ahead. Companies have been battening down the hatches and being more cautious in their spending as interest rates are hiked, but if underinvestment continues, it’s set to keep the UK on a low growth trajectory. Nevertheless, as worries ease as inflation inches downwards around the world, it’s keeping the globally focused index firmly on the front foot.”

George Lagarias, Chief Economist at Mazars comments: “The FTSE 100 broke yet another record, as a result of the general global equity rally. Despite the buoyancy, investors need to stop for a moment and think, what is driving positive sentiment?

“Presently, it’s really one single factor: the belief that we are at, or very close to, peak interest rates. However, none of the major central banks have yet actually confirmed that they are pausing rate hikes. Given that we are in the midst of an economic slowdown, and possibly a recession, we would approach the rally with optimism, but also a lot of caution.”