Thing are looking less rosy for owners of FTSE 100 stocks at present. Back in February, the Footsie index hit a lifetime high. This week, the London market is having its worst five days since March. So what’s worrying owners of UK shares?
Down goes the FTSE 100
At its all-time, intra-day high on 16 February, the blue-chip index briefly touched 8,047.06 points. As I write as the market closes on Friday, the Footsie hovers around 7,463.34.
Therefore, the UK’s main market index has lost around 7.3% from its lifetime peak. Here’s how it has performed over seven other periods:
| One day | -0.6% |
| Five days | -2.4% |
| One month | -2.2% |
| Year to date | +0.1% |
| Six months | -0.5% |
| One year | +6.3% |
| Five years | -2.3% |
Although the index has shown some recent weakness and is barely in positive territory for 2023, it has gained over 6% in 12 months. Adding in cash dividends takes this yearly return to 10%, which is just fine by me.
Storm clouds are gathering
Unfortunately, the UK economy faces strong headwinds over the next 12-18 months. Economic growth is slowing and a recession appears increasingly likely. Meanwhile, sky-high inflation and crippling energy bills have hammered disposable incomes.
But one thing that really bothers me is rising interest rates. As the Bank of England lifts its base rate to curb future inflation, life gets more expensive for homeowners, other borrowers, and businesses. At 5% a year, the base rate is now at its highest for 13 years.
Even worse, five-year fixed-rate mortgages are heading to 6% a year, while two-year fixes are already at 6.2% a year. This means that millions of homeowners face painfully higher loan repayments in 2023/24.
Could this trigger a stock market crash?
As a veteran of the October 1987, 2000-03, 2007-09 and spring 2020 meltdowns, I’ve seen my fair share of market crashes. But I’m not expecting London shares to plunge hard anytime soon.
While it’s true that the FTSE 100 is packed with rate-sensitive stocks, particularly big banks and financial firms, I don’t see the market falling as hard as UK house prices might. That’s because around 70% of Footsie earnings come from overseas, making it a more global than local index.
Also, in historic and geographic terms, the Footsie looks very cheap to me. It trades on a forward price-to-earnings ratio of 10.7, for an earnings yield of 9.4%. That’s a much lower rating than other major equity markets.
In addition, the FTSE 100’s forward dividend yield of 4.2% a year is well above comparable markets’ cash yields. Even better, this payout is covered 2.2 times by earnings, which offers a solid margin of safety.
In summary, to answer my title’s question: I don’t expect rising interest rates to crash the FTSE 100. Of course, something else might, but I’m afraid I’ve misplaced my trusty crystal ball right now!
