Why has the FTSE 100 hit another all-time high?

Analysts are increasingly optimistic that the world may, at last, be shifting into a sustained phase of expansion

Eurozone manufacturers reported their strongest month in almost seven years in December (Getty)

The UK stock market has continued an impressive bull run this week, with both the FTSE 100 and FTSE 250 hitting record closing highs on Friday.

The blue-chip index finished the week at 7,724, while the index of smaller companies finished up on 20,932, both slightly improving on their previous all-time closing highs set on Thursday. It is part of a broader trend that has seen equities around the world smashing records with increasing regularity in recent months.

In the US, the Dow Jones burst through the 25,000 milestone for the first time on Thursday, while the S&P500 – a much broader and more representative measure of the US economy – also hit a new high this week. In Tokyo, the Topix index hit heights not seen since 1991, before the country entered a prolonged period of stagnation.

Why has it happened?

A major factor is that all of the world’s major economies are growing reasonably swiftly now that the eurozone, which had been the laggard, is expanding at a healthy pace.

Co-ordinated economic growth has been elusive and short-lived in the years since the financial crisis, but analysts are increasingly optimistic that the world may, at last, be shifting into a sustained phase of expansion.

Eurozone manufacturers reported their strongest month in almost seven years in December, while in US jobs growth continued as indicated by the latest non-farm payroll figures released on Friday.

FTSE100 companies have also benefited from a fall in the value of the pound, which has boosted profits made in other currencies.

The other major factor has been extremely accommodating monetary policy. The Bank of England’s quarter basis point interest rate rise in November – its first for more than a decade – merely reversed a cut made to support the UK economy in the aftermath of the Brexit vote.

Interest rates are still at near all-time lows, meaning extremely poor yields on investments such as bonds are leaving investors with few options to obtain a return other than stocks.

Further economic good news would increase pressure on the Bank to raise rates which could put some downward pressure on equities.

What is the likelihood of a correction?

Many commentators have been talking about a correction in prices for some time but for Richard Stone, chief executive of The Share Centre, there is still enough demand at present to drive prices higher.

“I believe this is likely to continue and could drive the FTSE 100 Index above 8,000 for the first time in its history,” he said.

However, he warned that volatility will increase “substantially” over the course of the year. According to the widely-cited VIX index, volatility is currently close to an all-time low at present as almost all price movements have been upwards.

Kames Capital’s chief investment officer, Stephen Jones, agreed that things could get choppier for investors this year. It would probably be “naive” to anticipate that markets will continue on this path as they did in 2017, he said.

A return to volatility could be welcomed by investors, Mr Jones said, as it demonstrates that gains have been “hard won”.

He added: “Unless inflation rises materially and sustainably – which I doubt – then bond yields seem likely to remain at levels which offer support to equity markets (rather than emerge as a competitive alternative).”