The psychologically unimportant FTSE 8,000 level

The FTSE 100 index recently hit the 8,000 points level – at around the same time as I hit my …

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The FTSE 100 index recently hit the 8,000 points level – at around the same time as I hit my fiftieth birthday.

One of these events was a portentous milestone awaited for years that told me a lot about my likely future investing returns.

And the other was the FTSE 100 hitting the 8,000 points level.

Oh I hear your objections.

The financial media has been full of excited talk about the importance of the UK’s index of 100 leading companies achieving this latest record high.

At the least FTSE 8,000 is ‘psychologically important’, we’re told.

Meanwhile, my own anniversary barely got a mention!

Well more (small ‘f’) fool them.

Because unless you spend your time spread betting the stock market indices (you shouldn’t) or you write about investing for a living (pros and cons), then the FTSE 100 hitting 8,000 is about as important as anything you can divine from the leftovers of a KFC Bargain Bucket.

Here’s one we did earlier

Let’s detour to recall the sad history of the now-forgotten – yet also supposedly ‘psychologically important’ – FTSE 7,000 milestone.

Market commentators wrung many years of punditry out of FTSE 7,000. But if any Foolish investor made a penny by paying attention, then it was only through luck.

You see, the FTSE 100 hit 6,930 at the top of the late 1990s stock market bubble.

And as you can imagine, being just a whisker from 7,000 caused great excitement at the height of that bull market.

But the Dotcom crash put paid to any such exuberance. This slump took the UK benchmark all the way below 4,000 by early 2003.

The UK benchmark eventually rallied and by 2007 it neared 7,000 once more.

Until we ran into the Global Financial Crisis and it jumped back into the deep-end.

In fact, it wasn’t until December 2015 that the FTSE 100 finally recovered and tacked on the 70 measly points required to take it over 7,000…

…at which point it seemed to look around, get vertigo, and crash back below 6,000.

By 2016 we were back above 7,000. Until the Covid crash meant we weren’t.

All told as recently as early 2021 the FTSE 100 was again at the same level it had first hit 21 years ago!

Tell me again how index levels are a key signal of market momentum or some similar superstition?

Once more with feeling

At this point it’s traditional to bring dividends into the picture.

You see, the FTSE is a price index not a total return index. The relatively chunky dividends paid out by UK blue chips don’t add one jot to its advance.

Indeed, all things equal, dividends actually act as a slight drag on index gains.

And yet dividends really do matter.

When the FTSE 100 broke through its 1999 high for the – I don’t know, I lost count – time in early 2019 and pushed on – once again – to the oh-so-important 7,000 level, it had gone nowhere in price terms for two decades, but it had roughly doubled the money of even the most hapless investor who had bought at late ‘90s peak, so long as they’d reinvested their dividends.

Hence, I’d argue the exclusion from the FTSE 100 index of the returns from dividends is a big reason to pay it scant attention.

Another reason is that indices are regularly reshuffled. Today’s FTSE 100 has different constituents to the 1999 incarnation. Companies fade, are taken over, or grow to a size where they muscle another one out of the index.

So while the level of the FTSE 100 index tells us something, it doesn’t really tell us how the top 100 UK companies have fared over the years.

It doesn’t even tell us much about the UK economy.

At least three-quarters of FTSE 100 earnings are generated overseas. So a weak pound is far more of a force-multiplier than a robust GDP figure for multinationals like BP, Shell, and AstraZeneca that make up such a large part of the FTSE 100.

If anything, a strong UK economy is bad for FTSE 100 earnings, should robust GDP growth encourage a strengthening of the pound.

Diving beneath the index level

Some say the resilience of the FTSE 100 index last year – when, for once, we led the global indices – underwrites the importance of the advance to 8,000.

Doesn’t it show the FTSE 100’s time has come, they argue? And won’t this momentum continue?

Well it might. But if it does, it will be because of factors that really drive stock market returns. Not because of phantom animal spirits supposedly invigorated by our little corner of the investing landscape hitting an arbitrary 8,000 points.

The reason the FTSE 100 did well in 2022 has nothing to do with information contained in its price level and everything to do with its constituents.

The FTSE 100 is notoriously light on technology firms and high-growth stocks – areas of the market that were pummelled by rising rates in 2022.

Our leading index is weighted to cyclical firms – especially commodity producers – and old economy value-style outfits. Both did well last year.

Finally, since the EU Referendum in 2016 the UK market has been somewhat shunned by international investors. This has led to a derating of the UK’s biggest shares, even beyond their value stock underpinnings.

Which in turn meant that there wasn’t so much air to be let out of the UK balloon when asset prices everywhere popped last year.

Shrinking time horizons, broader investing horizons

One powerful tendency in markets is mean reversion. And there is plenty of precedent for the historically stretched valuation of racy growth stocks versus dowdy value shares to continue to reverse over the next few years – at least so long as interest rates continue to normalise and inflation doesn’t turn to deflation.

Should this reversion continue, the FTSE 100 will probably continue to do well.

But such future gains won’t have been magicked out of breaching the 8,000 level.

In contrast, as I said me turning 50 tells me something about my investing future.

The sad fact is I haven’t got so many years left ahead of me, and at some point, I will need to begin to drawdown my portfolio rather than continue to build it.

I don’t see a hurry – Warren Buffett is still stock-picking at 92 – but my shrinking time horizon is at least a reminder that I should stay diversified to maximise my chances of a prosperous old age.

Because one thing I cannot afford to do is to go all-in on the FTSE 100 at 8,000, only to see the UK benchmark flounder for another two decades!

P.S. As I write the FTSE 100 is already back below 8,000. Here we go again?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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