Every time the FTSE 100 comes close to reaching 7,000 points for the first time in its history, it sheds scores of points and disappoints most investors. The most recent example of this taking place has been this week, when the FTSE 100 came within just 29 points (or 0.42%) of reaching 7,000 points, only to fall back to its current level of 6867.
Investor Psychology
This seems to occur fairly regularly and has become something of a pattern in recent weeks. In fact, even while the Dow Jones and S&P 500 in the US were making record high after record high last year, the FTSE 100 was stuck at or around the same level as it reached an incredible fifteen years ago. Back then, though, the outlook was a lot different to what it is today and that seems to be a key reason why the FTSE 100 is unable to break through 7,000 points.
In other words, investor psychology is the main reason why the UK’s leading index is so scared of 7,000 points. The last two occasions where such a level has been reached have preceded two of the most devastating bear markets in living memory. The first, of course, was the bursting of the dot.com bubble which wiped 48% off the value of the index within four years. The second was the credit crunch, where the value of the FTSE 100 again plunged by 48% — this time the fall was much faster, though, with it reaching a low of 3530 within just seventeen months.
It seems, therefore, that a relatively large number of investors are deciding that the FTSE 100 is expensive at its current level because, in the past, such a level has indicated that the stock market is due for a major decline. This argument, though, has major flaws – not least because company earnings, the outlook for the economy and the risks to shares are markedly different than they were in 2000 or in 2007. As such, viewing the market as expensive or cheap based on its price level seems unreliable when the key drivers of the market are now so different.
Looking Ahead
Clearly, the FTSE 100 has the potential to easily surpass 7,000 points. Any one of the following catalysts could push it over the line: an improving outlook for the Eurozone, a Conservative victory at the General Election (due to the greater certainty it would provide versus a Labour win), a continuation of a loose monetary policy, an upturn in the outlook for the Chinese economy and, quite simply, an ISA-fuelled rally from 6 April. In other words, 7,000 points is so close that only a small catalyst will be enough.
And, once the FTSE 100 does pass 7,000 points, it is likely that investors will realise that life on the ‘other side’ is not so scary and that, following the disappointments of the dot.com bubble and credit crunch, it may just prove to be third time lucky for the FTSE 100.
