Since March 2009, the FTSE 100 (FTSEINDICES: ^FTSE) has risen by 94%. That’s an astounding rate of growth that, unfortunately, may not be repeated over the next five years. For starters, the UK and world economies are in much better shape now than they were in March 2009, so we’re not starting from such a low base level. Furthermore, we’re unlikely to have interest rates maintained at 0.5% over the next five years, while quantitative easing is already beginning to look like yesterday’s news.
While the next five years may not be quite as prosperous as the previous five (or so) years, they could still be hugely positive for investors. Furthermore, talk of a market crash appears to be misplaced. Here’s why.
A long bull market
A key reason given by those who think a market crash is coming is time. They say that because the FTSE 100 has delivered uninterrupted gains for over five years, it is due a correction or crash. However, the period since March 2009 has not been without rocky periods. For instance, the FTSE 100 fell from 5800 points to 4800 points in a matter of weeks in 2010. Similarly, it shed a thousand points in August 2011 and 800 points in mid-2013 — on each occasion it quickly recovered from the fall. So to say that there have been over five years of uninterrupted gains is simply inaccurate.
Furthermore, a five-year bull market is not a particularly long one and, therefore, it could easily last for another five years. Older investors will remember the crash of 1987 well, but what they may not remember quite so easily is the bull market that ran from 1988 until the dot.com bubble burst in 2000/2001. Comparing our current bull market to that one makes it seem middle-aged at most.
Certainly, the valuations of FTSE 100 stocks are not as low as they have been over the last five years. However, the FTSE 100 is still not overvalued. It trades on a price to earnings (P/E) ratio of 14 which, by historical standards, is not particularly high. Meanwhile, its yield of 3.5% is far better than the usual comparator; five year gilts. They yield a measly 2% and the potential for short term capital growth appears limited due to impending interest rate rises.
As stated, the next five or so years may not see share prices rise by as much as 94%. However, there are some fantastic opportunities on offer in the FTSE 100, with a potent mix of high yields, strong growth prospects and low valuations available to investors. Certainly, there will be lumps and bumps ahead, but the FTSE 100 looks as though it is only just getting into its stride and could deliver strong performance for a good while yet.
Peter Stephens has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.