On 15 February 2023, the FTSE 100 topped 8,000 points for the first time in its history.

The index, comprised of the largest 100 companies on the London Stock Exchange, reached a record high just a month after the International Monetary Fund predicted that the UK would be the only major world economy to shrink in 2023.

So what is the link between the stock market and the economy? And what can the recent rise tell you about your investments?

Keep reading to find out.

The record high comes at a time of economic and political uncertainty

A year on from the start of the war in Ukraine, its economic impact continues to be felt on global markets. As energy bills rise at home, the threat of recession looms.

Uncertainty remains, but there have been some glimmers of good news for the UK economy.

The Office for National Statistics (ONS) confirmed that UK inflation in January fell from 10.5% to 10.1% (better than the 10.3% than had been predicted). It is hoped that knock-on effect of falling inflation will be a less-than-expected hike in the Bank of England’s (BoE) base rate.

This would be good news for borrowers, who have already seen costs rise. The BoE has increased the base rate at 10 consecutive meetings of its Monetary Policy Committee (MPC) since December 2021.

The FTSE 100 reacted to falling inflation by peaking above 8,000 points (although it ended the day at 7,997). On 16 February the index closed above 8,000 for the first time.

Stock markets rise and fall daily but most important is your investment goals

Record highs for the UK index are great news for the 100 companies that make up the FTSE 100 and their shareholders, but what does it mean for your investments?

There are three key points to consider:

1. The stock market isn’t the economy

The FTSE 100, like the rest of the stock market, fluctuates daily. Rather than reacting to whether the news is good or bad, the stock market tends to react to whether the news is better or worse than expected. In that way, stock prices can be said to reflect investor confidence.

It’s also important to remember that the FTSE 100 (and other leading indices) are comprised of the largest corporations. You won’t find your local butchers or bakery on there, but these smaller businesses could be significant drivers of the larger economy.

Whereas the stock market is volatile in the short term, the economy – and economic forecasts – look at trends in things like unemployment and consumer spending over the longer term. While the markets and the economy might generally move in the same direction, the recent FTSE highs arrived with the UK on the brink of recession.

While it’s important to understand the state of the UK economy, you might find it makes more sense, in terms of your investments at least, to largely ignore the noise of stock market movements.

2. Diversification and risk management are key

You can afford to cancel out the background hum of stock market movements, especially index-specific ones because they don’t represent your investment.

A rise in the FTSE 100 won’t be exactly matched by a rise in your pension fund. That’s because your investments are diversified to spread risk.

Diversification means allocating your funds across asset classes, sectors, and geographical regions. This helps to smooth the jagged line of daily stock market fluctuations, as a loss in one area or sector will often be balanced by a rise elsewhere.

Different assets and sectors carry different levels of risk and your asset allocation will be carefully calibrated to match your desired investment style.

You’ll have a keen idea of your own risk profile. It might be based on the views toward money you developed in early life, but it will also be based on your investment timescales and your overall goal.

3. “How to invest” articles tell you nothing about your goals

You might have seen articles in the financial press titled ‘How to invest £10,000’ or ‘How to become an ISA millionaire’. While these might have their place, it’s important to acknowledge that they very rarely focus on the important element of investment: your goal.

The key to success isn’t investing £10,000 and seeing how quickly you make a certain level of return. Instead, success is measured by whether you reach your goal within your chosen time frame and while taking a level of risk you feel comfortable with.

Your goal will be personal to you, as will the path you take to reach that goal. And that’s where professional financial advice comes in.

Get in touch

If the current financial climate has you worrying about your investments, Boolers’ team of experienced professionals are on hand to offer reassurance. If you would like to discuss your current investment strategy or any other aspect of your long-term plans, please contact us today.

Please note

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.