What does an all-time high signal about a stock market index? Some investors may be asking themselves that, as the FTSE 100 today (29 October) hit a new all-time high.
On one hand, it might be a sign of strong performance, suggesting that FTSE 100 shares could potentially keep riding high.
But on the other hand, there could be a risk that a new all-time record is a warning signal that an increasingly frothy market is getting overvalued.
Thinking about value in the most helpful way
In one sense, it might not matter.
After all, a stock market index can move around – sometimes dramatically – but over enough time, fundamentals tend to prevail.
So, even if someone did put money into the FTSE 100 today and it then fell, if the investor’s long-term confidence in the index was justified such a fall may not make much difference to them. After all, share prices are only an indicator of what a share can be sold (or bought) for: there is no obligation to act on them.
But there is another sense in which I think the price of the FTSE 100 may not matter to an investor like me.
Rather than buying the index overall, I prefer to buy individual shares within it. No matter how well or badly the overall index may be doing at any given point in time, there will likely be some member shares that are overpriced and others that potentially offer long-term value.
Hunting for bargains
So, rather than fretting about what the FTSE 100 is doing today or this week or even this year, I continue to hunt for individual shares in it that may offer value over the long run.
For example, one defensive share some investors may eye if they think a record-setting index level suggests market froth is utility network provider National Grid (LSE: NG).
Demand for moving power around from where it is produced to where it is stored or used is high – and I think it is likely to remain that way.
National Grid also benefits from regulated pricing. Combined with its aim of growing the dividend per share in line with a leading inflation measure, its defensive appeal is understandable to me.
But the company is heavily indebted. Maintaining its network will require heavy ongoing capital expenditure.
Over time, to keep raising its dividend it may need to dilute shareholders by selling more shares and cutting its dividend per share, as it did this year. I will not touch the share with a bargepole.
One possibly undervalued share
By contrast, one FTSE 100 share I think may possibly offer good value today from the perspective of a long-term investor is JD Sports (LSE: JD). Indeed, I see it as a share investors should consider.
The JD Sports share price chart of recent years is not a thing of beauty.
Multiple profit warnings have dented investor confidence and I see a risk that demand for pricy shoes and sportswear could suffer amid ongoing economic weakness in many markets.
Still, the company is massively profitable, has a powerful brand, and has established a cult-like following among some customers across many markets globally.
Its current share price looks cheap to me when considering the long-term potential of such a business.
