Last week, I warned that the FTSE 100 (INDEXFTSE:UKX) was increasingly fragile and at the mercy of the next global shock.
And so it came to pass.
Within days, the index had crashed to a four-month low of around 6550, as the long-term bears finally emerged from the woods and started clawing away at investor confidence.
Just when I’d started throwing money into FTSE 100 trackers, in a bid to take advantage of a 5% drop in the index from its 52-week high of 6878, a far more surprising thing happened.
The index rallied sharply.
The Worried Well
Once again, the FTSE 100 has defied the doom-mongers, including me. How does it do it?
You would expect today’s geopolitical wobbles to have done serious damage.
In Iraq, it has become clear that the Islamic State will prove almost impossible to dislodge from its Sunni strongholds, and Western politicians won’t seriously try.
In the Ukraine, Vladimir Putin is sending suspicious aid convoys to rebel-held areas, with military convoys lurking in the vicinity.
This week’s disastrous European growth figures, which saw French GDP growth flat for a second consecutive quarter while Germany fell 0.2%, were a real shocker. Sanctions against Russia will only make matters worse.
UK wages are growing at their slowest ever recorded rate, company earnings have been weaker than expected, the UK recovery is far from a done deal.
There is so much to worry about, but the FTSE 100 doesn’t care.
Why?
Bad News Good
The bears may be lurking in the woods, but the bulls are still basking in the sunshine. All it takes is a bit of positive spin, such as a few smart bombs on ISIS, or a soothing nod from Putin, and out they come to play.
There’s another, even stranger, reason. We live in a time when bad news is seen as good news, as far as stock markets are concerned.
The bad news is that the recovery is still fragile. The good news is that this means interest rates will stay lower for longer, buoying stock markets and other risk assets.
The timing and scale of future interest rate hikes are now the single most important factor affecting stock market movements.
So this week’s news of falling wage growth in the UK was cause for celebration, because it defers the first Bank of England base rate hike until the first quarter of next year, at the earliest.
In the US, Federal Reserve chair Janet Yellen has made it clear she would rather fight inflation than another economic downturn, which suggests that interest rates will also stay lower for longer stateside.
Grateful stock markets celebrated. And investors who thought they could time the market were proved wrong yet again.
Rate Rise Wrong
It has been eight years since the US last hiked interest rates. When it happens, it will be a shock, but I suspect we will have to wait far longer than we think.
Central bankers in the US and UK don’t want to repeat the embarrassing error made by the European Central Bank in 2011, when it tightened rates in the teeth of a downturn.
That way the blame for the slowdown will land straight at their feet.
Ticking Timebomb
Currency traders have been betting that the UK will be the first major economy to hike rates, but I’m not so sure myself.
A new report claims that “soaring family debt is ticking timebomb for UK economy”, with every 0.5% increase in base rates cutting £4.8 billion from household spending.
Total household debt has risen 314% from £347 billion in 1990 to £1,437 billion last year, according to Verum Financial Research.
Frankly, the Bank of England daren’t risk it, especially with signs that the recovery will slow in the final months of this year.
The economic recovery still hangs in the balance. That’s bad news for many, but a bizarre buy signal for the FTSE 100.
Trading at 13.22 times earnings, and yielding 3.46%, it isn’t overpriced either.
