FTSE 100: record-breaking? Hardly

Newspapers usually don’t bother putting news about the stockmarket on their front pages unless something really exciting happens. This week, it seems something really exciting did happen. “Shares rocket to record highs,” said the Daily Express.

“FTSE 100 hits all-time high,” said The Daily Telegraph and Daily Mail. “Like it’s 1999: soaring FTSE at highest level for 16 years,” said The Independent. Even the usually sensible Times wasn’t immune to the overexcitement: its headline on the matter was “investors’ delight as shares smash record”.

This is, of course, all nonsense. The FTSE 100 is a nominal index, not an inflation-adjusted index. Adjust for that – and if you want the numbers to mean anything relative to real wealth, you have to – and the index is nowhere near its past highs. In 1999 it hit 6,930. On Tuesday this week it ended the day at 6,949.

But in the intervening 16 years, prices in the UK – as measured by the Retail Price Index (RPI) – have risen by more than 50%. So to beat its all-time high in any way that actually matters, the index would now need to be over 10,000. And that, clearly, is some way off.

Still, that doesn’t mean that investors who put money in a tracker fund at the market’s peak in 1999 haven’t broken even: add dividends in, says Adrian Lowcock of Axa Wealth, and the stocks in the FTSE 100 index have returned 66% in nominal terms since the peak – a real return of just over 1% a year. That’s better than nothing, of course. But as the Financial Times says, perhaps we should “keep the champagne on ice”.

So what next? Matthew Lynn looks at the psychological effects the post-1999 bear market has had on those in their 20s and 30s – he reckons their miserable experiences will be a barrier to the creation of a new “euphoric bubble” in the next five years or so. However, he also notes that returns from the UK should be “perfectly respectable”.

UK stocks aren’t expensive: on a cyclically adjusted price/earnings (Cape) basis, they are knocking around the long-term average of 15 times. There’s some insurance in that.

Those looking for something cheaper might consider the Gabelli Value Trust, or Brazil, where stocks have been ground down to a Cape of only ten times, making them some of the cheapest in the world.

Also of interest to long-term investors (which we assume most of you are) should be water: drought is nasty, but the threat of it also drives the kinds of innovations we want to invest in.

Finally, hang on to your gold – amid all the “all-time high” thrills, remember the US is overvalued; global growth is pretty pathetic; the Greek situation is impossible to resolve; and global monetary policy is as bonkers as ever. There could be another global crash any day…

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