The magic number isn't far away. What to do?
If the FTSE rises by just 2% from where it is as I write these words, it will pass the 6,000 mark -- a level that it breached briefly in early July, before plunging down to 5,000.
And when it does pass 6,000, I've no doubt that we'll see the usual comments churned out. You know the sort of thing...
- It's a bubble... Sell!
- It'll never last... Sell!
- Valuations are looking 'demanding'... Sell!
And so on. In short, while 5,999 will attract almost no comment, a number beginning with a six suddenly turns everyone into an instant stock market pundit.
Boom and bust
Now, to be sure, the market doesn't have a particular good track record when the FTSE begins with a six.
The market briefly passed 6,000 before plunging down to 5,000 in the wake of the collapse of Long Term Capital Management, following the Asian financial crisis in 1997.
It recovered, passed 6,000 again, climbed to 6,951 on 31 December 1999 at the height of the dotcom boom, and then crashed -- bottoming at 3,287 in March 2003.
And, prior to the credit crunch and ensuing recession, it passed 6,000 again, peaked at 6,732 on 15 June 2007, before slumping to an intraday low of 3,461 on 9 March 2009.
So you could say the FTSE's got form. Sell!
Irrational exuberance
But I certainly won't be doing anything of the sort. For whatever the chartists and day traders say, the fundamentals of today's market are different.
Have we got a combination of heady GDP growth and high interest rates? No. Cheap credit and 'irrational exuberance'? Again, no. Are valuations at stratospheric levels -- the FTSE's P/E of 30 or so in March 2000? If only.
The real economy is still very much on its knees; the last quarter's GDP growth was negative -- and some people are predicting another ten years of working our way out of debt.
More to the point, perhaps, the market is trading on a P/E of just over 10 -- a third of 2000's lofty peak.
Profit-driven
Now, to be sure, 'quantitative easing' and the European Central Bank's injection of €489 billion of additional liquidity into the banking system is doubtless helping share prices. As is a sudden flurry of post-Christmas good news, especially with respect to the American economy.
But I think there's a more fundamental factor at work. Rising profits, in short. And rising dividends, as those profits are distributed to shareholders.
We've seen it this past week in the form of announcements from AstraZeneca (LSE: AZN) and BT (LSE: BT-A), for instance. Revenues might be down -- but profits are up, thanks to factors such as deleveraging, cost-cutting and lower input prices.
More cheer
And in the coming week, with results from BP (LSE: BP), GlaxoSmithKline (LSE: GSK) and Reckitt Benckiser (LSE: RB) due, I'll be looking hard to see if there's more of the same. The economy might not yet be doing much for the top line -- but good old-fashioned hard-nosed management is certainly delivering growth to the bottom line.
In fact, as I wrote in early January, the latest set of corporate profitability figures -- for the third quarter of 2011 -- show corporate profitability at its highest since the third quarter of 2008.
There have now been eight successive quarterly increases since the third quarter of 2009, which represented a 16-year low. And the signs, on the whole, seem good that the trend will continue.
Rational response
In short, when we do pass the magic 6,000 mark, I won't be selling. I'll be doing what I'm doing now: looking for bargains, and buying into them when I spot them.
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> Malcolm owns shares in AstraZeneca, BT, BP, GlaxoSmithKline and Reckitt Benckiser. The Motley Fool owns shares in AstraZeneca, GlaxoSmithKline and Reckitt Benckiser.
