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The FTSE 100: The Only Way Is Up!

CashThe FTSE 100 is in a bit of a meltdown at the moment, dropping ever closer to the 6,000-point level again — and it’s only a rally of 60 points today that’s lifted it to 6,256 as I write.

That’s a fall of 6% over the past 12 months, 8% since the beginning of 2014, and a drop of 9.5% from the index’s 52-week high of 6,905 points set as recently as 4 September! And where bullish investors were anticipating a break through the 7,000 level by the end of the year, some bears are now suggesting the FTSE could crash down through 6,000, perhaps even as low as 5,000!

I reckon the bears are wrong and the FTSE will finish 2014 safely above 6,000, and I’ll tell you why:

Short term

It was Benjamin Graham who famously likened the stockmarket to a voting machine in the short term and a weighing machine in the long term. He meant that people overreact to short-term sentiment and “vote” based on popularity, but over the longer term the markets weigh up all the evidence and come to the right balance.

As of the close of play yesterday, the FTSE 100 was on a P/E ratio of 12.5, which is below its long-term average of around 14. And we’re looking at a dividend yield from the index of more than 3.7% — the best it’s been for quite some time.

If the growliest of the bears are right, a fall to 5,000 would drop the index’s P/E multiple to just 10 (assuming earnings don’t change), and would push the dividend yield up as high as 4.6%. To me, in the current strengthening economic climate, that’s unthinkable.

What to buy?

If the FTSE is undervalued right now, which I’m convinced it is, where should we be looking for bargains?

Well, the supermarket sector is battered right now, and even if you think Tesco would be too risky with its current accounting debacle unresolved, what about J Sainsbury? The award-winning supermarket has seen its shares fall 36% since the start of 2014, and that’s looking oversold to me.

I think there’s value to be had in the mining sector too, with demand and shipments of key commodities remaining strong despite fears of over-supply. I see Rio Tinto as cheap right now, as apparently does Glencore which saw its merger approach rebuffed in August. There could be more bid potential in the sector.

Happy New Year?

So, a bearish end to 2014 and gloom in the New Year? Not a bit of it. the FTSE just looks too cheap to fall much further, and I can see renewed optimism and a return to bullish growth in 2015.

Now, in the words of that other stock market expert Warren Buffett, who’s got the courage to be greedy when others are fearful? Remember, do your own research and only buy if you think the price is right.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.