The FTSE 100, Britain’s benchmark equity index, is down more than 20% since its high in April 2015, and investors are increasingly worried that it’s signalling a forthcoming recession. But is the FTSE really a good measure of the overall health of the British economy?
Not really, says Samuel Tombs of Pantheon Macroeconomics. Not only is there not a reliable relationship between a bear market in stocks and the arrival of a recession, but the FTSE itself does not mirror the make-up of the UK economy.
For example, oil, natural resources and financial services companies are around 32% of the index. But these sectors accounted for just 8.5% of UK GDP last year, down from 11.3% in 2007. What’s more, around three-quarters of total revenues of FTSE companies are generated overseas, so their earnings say little about the health of the domestic corporate sector, notes Tombs.
Hence there’s little reason to expect further stock price declines, “which may well happen”, to reflect a UK recession, says Linda Yueh on Forbes.com. First, “the hit to the market is coming from largely global, not domestic, factors”.
What’s more, it’s important to bear in mind that stocks are coming down from levels that have been inflated by the glut of cheap cash that central banks dumped on the world – even if the UK market “was never as frothy as the American or Chinese ones”. The real problem for the UK economy is not sliding shares, but the prospect of a rate rise at a time when debt levels remain high. This is “the real trigger to watch for” – but it “is yet to come”.