The FTSE 100 has remained broadly flat since the turn of the year while the S&P 500 has surged 12.75%. And last week, the US index exited its longest bear-market slump since the 1940s.
In fact, having closed more than 20% higher than its October lows, it’s now crossed into a new bull market. At least according to the most widely accepted definition of the term.
But what about the FTSE 100? Is the UK’s blue-chip index next in line for a bull run?
Big tech bull run
The first thing to note about the S&P 500’s rally since bottoming out in October is its lack of breadth. It has been almost entirely driven by a small handful of mega-cap tech stocks. Mega-cap stocks are generally thought to be companies with market values above $200bn.
Below, we can see how strongly some of these technology leviathans have performed in 2023:
|Advanced Micro Devices||95%|
The common denominator in these companies is the focus on artificial intelligence (AI). And the understandable hype around this technology has pushed some valuations up to eye-watering levels.
Indeed, without the emergence of ChatGPT, the S&P 500 might even have been in negative territory this year.
What about the Footsie?
Unfortunately the FTSE 100 has neither mega-cap tech stocks nor obvious AI-related companies.
Now, that’s not to say the index doesn’t contain quality firms already harnessing the technology.
RELX, Sage and Experian spring to mind here, as each seems incredibly well placed to benefit from major advances in AI computing. And all three are up in 2023, rising 11.75%, 16.1% and 4.5%, respectively.
However, they’re not large enough to really drive an index rally in the same way as, say, Apple and Nvidia can.
So I’d be surprised if the FTSE 100 took off this year. Still, it would be a pleasant surprise all the same!
What I’m doing
Either way, the City is predicting that FTSE 100 dividends could top £84.8bn this year. That’s not far off the record £85.2bn paid out in 2018.
So it seems UK firms are doing better than some of the gloomy market commentary would have people think.
To me, the resilience of the UK equity market appears underappreciated. So my focus now is on investing in quality FTSE dividend stocks trading cheaply. High yields and income, basically.
That doesn’t mean I’ll be selling my US tech stocks, but I certainly won’t be adding to them.
I think the important lesson here for investors is that diversification is vital. Not many investors were predicting that large tech stocks would rebound so dramatically in 2023.
Indeed, many thought that the FTSE 100, with its cheap valuations and high yields, could outperform the S&P 500 this year as it had done in 2022. The opposite has proved the case so far.
As investor Ray Dalio said: “He who lives by the crystal ball will eat shattered glass.”
But by holding both UK stocks (many of which did very well in 2022) and US stocks (some of which are doing very well now), investors don’t need a crystal ball. A diversified portfolio is often more than enough.