The S&P/ASX 200 Index (ASX: XJO) has seen plenty of volatility since the start of the year, as we can see on the chart below.
Earlier this year, the index managed to climb above 7,500 points. While it didn't manage to beat the August 2021 high, it was impressive considering all the interest rate rises there have been.
In February, things were still looking good. The iron ore price was above US$120 per tonne, the banking sector's competition didn't seem overly negative, and retailers were still achieving solid numbers.
But then each of these areas worsened. The iron ore price briefly went below US$100 per tonne, Commonwealth Bank of Australia (ASX: CBA) warned of very competitive conditions for banks, and retailers are now reporting much weaker conditions.
What could drive the index higher?
The ASX 200 Index is currently sitting at around 7,180 points. It would only take a 4.4% rise for it to get back to 7,500 points, which doesn't seem too steep of a hill to climb.
Two of the biggest areas of the ASX are mining and banking.
The ASX mining shares of BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), Fortescue Metals Group Ltd (ASX: FMG), and Mineral Resources Ltd (ASX: MIN) are all iron ore miners. The index also contains numerous banks including CBA, National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), and ANZ Group Holdings Ltd (ASX: ANZ).
For the miners, the key will be what happens with the iron ore price, as an increase would drive profitability, dividends, and investor excitement. According to Commsec, the iron ore price is now close to US$113 per tonne. The promise of Chinese stimulus to boost China's property sector could be a helpful support for the iron ore price.
Turning to ASX bank shares, competition has been the key worry because it could hurt the net interest margins (NIMs) of banks. But there are now signs that competition is easning, which could mean stronger investor confidence.
If the iron ore price stabilises, or even strengthens, I think that would drive the ASX 200 Index higher.
I'm less certain about a recovery for the banking sector. There are still numerous lenders out there, keeping the major banks on their toes. Plus, there is a growing number of loans going into arrears, which could be a drag on earnings and confidence.
A recovery to 7,500 is possible in 2023, but I wouldn't expect it over the next couple of months.
Likely growth in the long-term
Even if there isn't a quick recovery for the ASX 200 Index in the short term, I think it will get there thanks to the power of re-investing and compounding.
Many businesses in the ASX 200 make a profit, and they don't pay out all of their profits in dividends with every result. With retained profits, businesses can use the money to grow their companies, which could then drive their share prices higher.
Over time, the compounding effects of that retained profit can make a big difference to valuations. That's why I think the value of a lot of businesses will keep rising, even if they don't outperform the world's best businesses.
So, even if it takes a while, I think the ASX 200 Index will get back to 7,500 points, one way or another.
