It looked like inflation was cooling, which would feed through to lower interest rates and boost stock market strength. Well, wouldn’t it? Instead, I scratch my head over the FTSE 100 this week and ask why it is down again.
At market close on 20 October, the top London index ended the day on 7,400 points. It’s dropped 1% per day for three straight days, and by 2.6% on the week.
It’s not just the FTSE 100. The FTSE 250 index of mid-cap stocks hit a new 2023 low this week. So what’s going on?
Bright skies ahead?
Public sector borrowing in the UK came in at £14.3bn in September. That’s 10% lower than the same time in 2022. A fall in debt interest repayments helped there.
And the UK government still hopes to see inflation halve by the end of the year, which would be good too.
But a number of factors are turning investors away from shares.
Government bond yields have climbed, breaking through the 5% level. The FTSE 100 has still returned an average of 6.9% per year in the past 20 years, though.
No-risk options
But for a lot of people, it just isn’t worth taking the risk for such a small difference. Bond yields are guaranteed, while stock market returns are far from it.
Talk of interest rates staying higher, longer, was boosted by September inflation, which didn’t fall.
We just heard that retail sales slumped in September, as it’s been too warm for folks to think about buying their winter woollies.
And the escalating human tragedy in Ukraine, Israel, and Gaza is making world markets very wobbly indeed.
But why?
But, apart from all that, why is the FTSE 100 down this week?
To be serious, I think the short-term outlook of the big City institutions has a lot to do with it.
It’s not surprising, as they have to balance their current quarter’s returns with hedging against risk. So, right now, a shift from stocks towards bonds, seems inevitable.
My personal take? To use a catchphrase I heard on the TV once, lovely jubbly.
For private investors, this is surely a further opportunity to buy top-quality Footsie stocks on the cheap.
Long-term outlook
I don’t care about short-term uncertainty, or guaranteed returns. I just want to boost my chances of superior long-term returns, over the next 10 or 20 years.
On that timescale, I still think UK stocks should outperform bonds, cash savings, or any other fixed-return options. Why do I think that?
It’s happened for more than a century. And I see increasing signs that FTSE 100 stocks are extra cheap now.
City analysts expect ordinary dividends from top-tier firms to set a new all-time record in 2024.
I’m not alone
And you know who else thinks shares are worth buying now? The FTSE 100 firms themselves.
In the past week, we’ve seen Tesco, Shell, HSBC Holdings, Barclays, Centrica, Diageo, and a whole load more companies engaged in share buybacks.
I think they have it right.
