Since March 2009, the FTSE 100 has risen from a low of 3530 points to its current level of 6405 points. That’s a gain of 81% in just six and a half years and works out at an annualised rate of 9.6% during the period.
Of course, such strong gains have coincided with an ultra-loose monetary policy from the US Federal Reserve that has seen monthly asset repurchases and near-zero interest rates provide a significant boost to the UK’s leading index.
However, this week saw the end of the programme, with the Fed having tapered it off during the course of the year. Could the end of monthly asset repurchases signal the end of the FTSE 100’s six-and-a-half-year bull market? Or can the UK’s leading index push on to higher highs?
A Different Situation
Although the US and global economic recovery has disappointed many investors, with it seemingly taking a long time to come through in terms of improved GDP and jobs numbers, the world economy is in a very different situation today than it was in March 2009.
Indeed, while there continues to be a certain degree of slack in the US economy, recent economic data points to an economy that is well on its way to standalone growth and long-term prosperity. Certainly, low interest rates are still a necessity, but monthly asset repurchases do not appear to be required any longer. As a result, it is unlikely that the end of the programme will cause a dramatic fall in the FTSE 100’s level.
Tapering
Furthermore, the Fed has tapered the programme and, perhaps more importantly, has been as transparent as possible regarding its intentions to bring it to a close. This means that investors know exactly when and why the programme is ending and, as such, it is improbable that there will be a snap reaction to the end of the programme in the short term. Of course, there will inevitably be concerns over whether economic data will continue its recent strength, but there is unlikely to be a short-term ‘surprise’ from the ending of the programme.
The Long-Term Effect On the Economy
Where the end of the Fed’s stimulus could hit the FTSE 100, though, is in terms of its impact on the global economy in 2015 and beyond. Indeed, the UK, US and Europe continue to be in the midst of a deflationary period, with inflation being low even though interest rates are near-zero across the developed world.
As such, it now seems clear that the Fed’s stimulus programme has had a major impact on the progress of the US and global economies in recent years, which means that its end could cause inflation to pull back further and result in slow growth over the medium to long term. Certainly, recent data indicates that asset repurchases are no longer needed but, after years of dependency, the thirst for more stimulus cannot be ruled out over the medium to long term – especially if economic data does start to disappoint.
Looking Ahead
So, while the end of the Fed’s stimulus programme does signal the start of a potentially more uncertain period, the FTSE 100 is unlikely to become dominated by bearish sentiment in the short to medium term. As such, now could prove to be an opportune moment to buy shares in high-quality companies at attractive prices.
