If I had a pound for every time I’ve read that stock markets were overvalued and heading for a summer crash, I’d have made more money than most investors this year.
With the benchmark FTSE 100 (FTSEINDICES: ^FTSE) index up just 1% this year, that admittedly isn’t much of a boast.
Quite frankly, nobody seems to trust today’s go-nowhere market. And it isn’t hard to see why.
We live in dark and difficult times.
The West Was The Best
At the turn of the millennium, the West stood triumphant. Capitalism had won, markets were booming, technology was set to transform our lives.
On 31 December 1999, the FTSE 100 closed at an all-time high of 6930.
Hours afterwards, the Millennium Dome opened.
You know what happened next.
History Bites Back
The technology crash, 9/11 terrorist attacks, ill-fated wars in Afghanistan and Iraq, the rise of the BRICs and the self-inflicted wound of the credit crunch have knocked our self-belief.
More than five years after the financial crisis, we still haven’t recovered.
The developed and emerging world are drowning in debt, the eurozone is adrift, the Middle East is in uproar and Russia is aggressively trying to rebuild its empire.
Despite that, the FTSE 100 has doubled in that time to trade at just below 6800. That’s a whisker below its 52-week high of 6878, which it hit in mid-May.
And it’s not giving up those gains lightly.
Central Bankers Won’t Always Save Us
One reason the FTSE 100 remains buoyant is that investors believe stock markets are backstopped by central bankers, who simply can’t afford to let them crash.
But with the US Federal Reserve tapering its QE programme, this can’t be taken for granted.
Another reason is that returns elsewhere are so poor, especially on cash.
But that assumption will also be tested, probably next year, when interest rates may finally start rising.
Brighter Times Ahead
Perhaps the main reason the FTSE 100 won’t crash is that the recovery really is on its way.
The UK economy is now back to its pre-crisis peak and growing faster than the other G7 nations. This isn’t just a housing and consumer boom, manufacturing, servicing and construction are all growing.
The US is piling on jobs, 280,000 a month at last count. And there are early signs that the US earnings season will be better than expected.
A strong US will be good for global growth, sucking in imports from around the world.
At the same time, inflation remained subdued.
You Can’t Wait Forever
I’ve been waiting for the FTSE 100 to crash, too. I thought it would be a great opportunity to buy a low-cost FTSE 100 tracker such as iShares Core FTSE 100 Ucits ETF or the Vanguard FTSE 100 Ucits ETF.
I’m not waiting any more.
Trading at 13.9 times earnings, the FTSE 100 isn’t exactly overvalued. It also offers a dividend yield of 3.43%, far more than you would get on cash.
The FTSE 100 remains vulnerable to a global shock or rising energy prices.
But if you keep hanging on waiting for a crash, the most likely result is that you miss the next leg of recovery instead.
