At the start of each year, it’s common to hear stock market forecasts. Already this year, I’ve heard many FTSE 100 forecasts for 2020, with plenty of analysts predicting that the index could finish the year above 8,000 points.
Personally, I think forecasting the level that the FTSE 100, or any other stock market index, will finish the year at is a pointless exercise. Given the unpredictable nature of stocks, you’re setting yourself up for failure. That said, I do have a number of FTSE 100 predictions for 2020. Here’s a look at what I’m expecting this year.
At least one pullback
My first prediction is that the Footsie will experience at least one decent pullback of at least 5% this year. Last year, we saw a solid pullback in August. The year before, there were a couple (including one significant drop late in the year). With investors remaining on edge due to the high level of economic uncertainty across the world right now (the Iran situation, trade wars, slowing global growth, Brexit) I don’t think it will take much to see another stock market dip in the near future.
Investors shouldn’t fear a pullback, however. They are a normal part of stock market behaviour. And I’ll point out that when other investors are selling, it can be a great time to buy.
Huge dividend payouts
My next prediction for 2020 is that the FTSE 100 will continue to throw off a huge amount of cash to investors in the form of dividends.
Last year, total dividends paid by FTSE 100 companies amounted to around £90bn. That’s an extraordinary amount of cash. This year, AJ Bell forecasts total dividends of about £91bn, which would be a new record.
I also predict that the dividend yield on the FTSE 100 will remain very attractive relative to interest rates on savings accounts. With plenty of stocks in the index offering yields of 5% and higher as we begin 2020, it’s a great time to be a dividend investor.
Weighed down by underperformers
Finally, I predict that the FTSE 100 will continue to be weighed down by low-growth companies this year as it has been in the recent past.
Take a closer look at the Footsie, and you’ll see that it has a heavy exposure to industries such as oil & gas, banking, and tobacco – all of which are likely to face challenges in the year ahead (the increasing focus on sustainability, competition from digital banks etc.) At the same time, there’s a significant number of debt-laden companies within the index such as BT Group and Vodafone that are also struggling for growth. These kinds of companies are likely to limit the FTSE 100’s gains, in my view.
Given the composition of the index, I believe that the best way to profit from the FTSE 100 is to pick individual stocks for your portfolio rather than investing in the index as a whole through a tracker fund.
By carefully selecting high-quality FTSE 100 businesses for your portfolio, there’s a decent chance you could outperform the index.
