Will the FTSE 100 continue to soar?
Friday 13th didn’t prove to be unlucky for the FTSE 100, which reached an all-time high that day, closing at 7,337.81, thus rising for an unequalled 14 consecutive sessions. Since then, the market has fallen back somewhat, leaving investors to ask whether this run can continue or if it has finally run out of steam.
Some commentators are sounding a note of caution, pointing out the average prolonged fall of c.40% that followed previous peaks. FE Analytics data shows that the FTSE 100 fell 50.42% from its dotcom peak in December 1999 to 10 March 2003 and then 47.82% from 12 October 2007 to 03 March 2009. The latest fall, from 27 April 2015 to 11 February 2016 was just 22.08%. However, others feel that this ‘unloved’ bull market still has further to run.
So what has been driving this bull market? There are certainly signs that markets became momentum oriented in 2016 and that momentum rather than valuation has been driving share prices to some extent.
However, a more significant driver behind the FTSE 100’s performance, perhaps, has been the fall in the value of the pound against most major currencies. This has benefited the large multinational companies that dominate the index and many currency traders foresee further weakness in the pound going forward as the risk of a hard Brexit looms.
Good economic figures have also helped the market, with GDP growth holding up well post-Brexit, defying the expectations of most experts. However, many, including the influential EY Item Club, predict a slowing down of growth over the next couple of years.
Elsewhere, it has been argued that the FTSE 100 is in a relatively strong position as the dangers faced by markets in the US and Europe are more complicated and less well defined than the potential Brexit pressures that are the main issue in the UK.
Others feel that the FTSE 100's current run represents the start of a fundamental shift that is helping the index catch up with the stronger performance of its global rivals since 2000. The FTSE 100 is currently only 2-3% above its dotcom 1999 record level and has underperformed the S&P 500 since its millennium-era peak.
Certainly the FTSE 100 dividend yield (c.3.7%) supports the current level of share prices, whilst it could be argued that the market is not expensive, trading on a significantly lower price to earnings ratio than the US, for example. The consensus view also is that there is a lot of cash on the sidelines held by both private and institutional investors, so if some uncertainties are removed, markets could move higher.
Overall then, the FTSE 100 could well continue to progress. A rebound in sterling remains the main risk, but with uncertainties over Brexit likely to dampen the pound, the index has a chance to catch up with its rivals after a long period of relative underperformance.
However, if you listen to Permabears, we could instead be in for another year of volatility, surprises and even a market correction along the way, even if the FTSE 100 were to make a further new high in 2017.
So as always, investors should not get over-confident, should remain focused on their long-term goals, whilst possibly buying the market dips.
This article is obviously just for information and discussion and is not investment advice. For more information or advice on your financial and investment planning, contact Kellands today.