FTSE 100 still capable of breaking records

October has acquired a reputation for volatility and crashes. Indeed, seven of the market’s 10 biggest fall have occurred in this month. Avoid the banana skins, though, and it can be extremely profitable, ranking as the second-best month of the year behind April for equity returns. We’ve seen some of that volatility already, and chatter about a ‘market top’ has grown louder.

It certainly picked up Thursday as the City “celebrated” the 30th anniversary of ‘Black Monday’ with a lurch south to a fortnight-low. However, the FTSE 100 (UKX) has since risen sharply to its best in seven days and just 40 points from 7,600 and a new record high.

And this week has seen a number of other milestones reached. The Dow Jones raced above 23,000 for the first time ever, taking less than six weeks to add the last 1,000 points. The broad Wilshire 5000 index also recorded its best levels for the 47th time in 2017.

Latest US company quarterly earnings are beating expectations – look at IBM’s fightback – and President Trump’s tax plans could still deliver a boost to the bottom line. Overnight Thursday, Republicans voted 51-49 to adopt the 2018 budget resolution. That’s one less hurdle preventing Trump finally getting a policy idea over the line.

Further afield, the Nikkei has just hit a two-decade high, with exports there up for a tenth straight month amid demand for Japanese technology.

That puts what’s happening in London into perspective. Investors are right to be wary about a recent spate of high-profile profit warnings – GKN (GKN), Mondi (MNDI), ConvaTec (CTEC) and Merlin Entertainments (MERL) – and Brexit presents its own set of special circumstances, but many companies are delivering strong results and valuations are not excessive.

And there’s less certainty this week about a first increase in UK interest rates for a decade next month. Inflation here is now confirmed at 3%, the highest since April 2012 and still easily exceeding wages growth, but we may not be far from a peak, and any increase risks hurting the vulnerable consumer.

“Our short-term forecasts suggest a peak in CPI inflation at 3.1% in October,” writes David Page, senior economist at AXA Investment Managers. “For now, we remain of the view that the early months of 2018 are likely to see headline inflation begin to retreat, forecasting inflation falling back below 3% at that time.” It’s tipped to ease to 2.7% in 2017 and 2018, before easing back to 2.2% a year later.

There’s less upward pressure on sterling currently, given the rate debate and uncertainty over Brexit negotiations. A weaker pound is typically good news for the FTSE 100’s overseas earners.

Don’t be surprised to see a pullback between now and Christmas in some markets which have raced ahead this year, but it’s unlikely to be the crash everyone is predicting.

While inflation is currently outstripping wages growth, the UK unemployment rate is at its lowest since 1975 and any small rise in interest rates will not pull the rug from under this market. Returns currently offered by equities are hard to match.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.