Is The FTSE 100 set for a summer rally?

This summer could be a little more volatile than in the past

Updated: 
FTSE reaches 7,000 points

This article was written by Peter Stephens for The Motley Fool

The old saying 'sell in May and don't come back until St. Leger day' tends to be surprisingly accurate. Of course, there are exceptions, notably in 2012 when the FTSE 100 gained 8.6% over the summer months.

However, whether it is due to a lack of company announcements, people being on holiday or whatever else, the summer months tend to see a mild decline in the value of the wider index.

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Possible risks

This year, though, the summer could be a little more volatile than in the past. That's at least partly because we are set to enter an uncertain period, with the US due to begin the long-awaited process of increasing interest rates later this year. This is a key moment for the global economy, since it signals that policymakers in the US are confident enough that the global financial crisis is behind us and it is now time to return to a more normal stance on monetary policy.

However, the increase in interest rates, although set to be very slow and steady, still has the potential to spook investors and hurt sentiment in stock markets around the globe. As such, the second half of 2015 could be more volatile than usual.

Furthermore, the EU referendum and continuing possibility of a Greek exit are also set to act as a brake on the performance of the FTSE 100. Clearly, Greece exiting the Euro would not exactly be a major surprise, since the possibility of it happening has been discussed quite widely for a number of months. The problem, though, is that it could trigger the electorates of a number of other countries to push for a change in government, towards one that is pushing for a Euro exit. As such, a Greek exit could realistically cause further uncertainty for the single currency region.

Five shares to watch

Possible catalysts

On the flip side, the impending US interest rate rise may pass without as much fanfare as many investors are expecting. For example, the end of the Federal Reserve's asset repurchase programme seemed to do little to hurt economic growth prospects or investor confidence in the economy and, with the pace of an interest rate rise likely to be pedestrian, it may not cause investor sentiment to deteriorate.

In fact, the longer term outlook for the US and global economy is probably the most positive it has been since prior to the credit crunch. Certainly, there are potential challenges ahead, as outlined above, but company earnings are on the up, inflation is under control and economic growth is relatively positive and stable. Furthermore, the effect of quantitative easing on the Eurozone is yet to fully materialise, which could act as a catalyst on the price levels of stock markets across the globe.

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Looking ahead

So, while this summer may be an uncertain one, it appears to be 'business as usual' for most investors. In other words, there are risks and there are potential catalysts, with the index likely to drift slightly downwards over the next three months as investor interest turns towards holidays and other pursuits. As such, for long term investors, the summer period remains a great time to drip ISA money or other cash into high quality stocks trading at appealing prices.

And, with that in mind, the analysts at The Motley Fool have written a free guide called 5 Shares You Can Retire On.

The 5 companies in question offer stunning dividend yields, have fantastic long term potential, and trade at very appealing valuations. As such, they could deliver excellent returns and provide your portfolio with a major boost in 2015 and beyond.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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