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There Are Still Big Gains To Be Made From A Flat FTSE 100

The FTSE 100 dipped to 6,449 points on  4 February, 2014. Last week it closed at 6,550 points. The bottom line is that, to the outsider looking in, nothing much happened.

There was, however, significant movement on the odd occasion. Investors can get in on this action. Timing the market can be difficult, but this year is likely to present more opportunities to take advantage of dips and peaks in the FTSE 100.

On the way down

Last week the World Bank once again downgraded its expectations for global output in 2015, saying the global economy would grow 3% in 2015 (it’s a nice round number). That’s at the extreme macro level. Burrow all the way down to the micro level and you’ll find that wages in Britain have only just started to match inflation. It’s a wonder why anyone’s spending at all really!

That’s why we’re seeing so many challenges facing FTSE 100 sectors like the supermarkets and the banks. Britons are still reluctant to both borrow and spend. There’s little sign of that changing this year, unless the growth we are seeing in the services sector translates across to the manufacturing and export sectors. Otherwise, GDP growth — and market growth — is likely to be sluggish.

The sectors I believe most at risk of weighing on the index are oil & gas, food & beverage, and the banks.

On the way up

Midway through last week the European Court of Justice paved the way for the European Central Bank (ECB) to ‘print money’. That is, to buy government bonds from Euro sovereign countries in order to increase the supply of money and stimulate aggregate demand. It all dates back to Mario Draghi’s “we’ll do whatever it takes” speech in 2012. The ECB will make a further announcement on a possible program of quantitative easing (QE) midway through this week.

Over on Wall Street — well they simply haven’t been able to get enough of QE. It, together with “crisis-level” interest rates, has been the drug in the veins of Wall Street high-flyers for many years now. If both Threadneedle Street and the ECB end up concurrently running QE programmes, equity markets right across Europe and Britain should feel the benefits of that, just like we’ve seen on Wall Street.

Bumps in the middle

So while the market is climbing up the mountain, and tumbling back down again, there will be moments of ecstacy and agony. This Fools believes that merger and acquisition activity will be part of that narrative. Merger activity — in my view — is most likely to stem from the banking and insurance sectors, as well as the energy and gas sectors — most notable is the potential tie-up between BP and Royal Dutch Shell.

Recently, large movements in commodities prices, earnings announcements, and speculation about what the ECB may be doing with its monetary policy, have all caused decent movements in the market. I expect that will continue.

Are we there yet?

A lot of people are wondering when the equity market is going to go back to the ‘good old days’ of just steadily rising and then suddenly falling. For now at least I think those days are gone. Instead, many market watchers — such as business and finance commentator John Mauldin — argue that markets will swing back and forth in between going nowhere (aka rising and falling by less than 0.5%).

The order of the day will be volatility. Diversifying your portfolio with a series of blue-chip companies may not cut the mustard any more. You really need to do your homework now.

Over the past 5 years the FTSE has done very well. Over the past 12 months it hasn’t performed particularly well at all. It does, however, remain on a price to earnings ratio (P/E) of around 15, and motors along with a dividend yield of 3.5%. In other words it’s not a bad investment, but you could do a whole lot better by taking an active interest in the market and chasing some of the more interesting stocks.

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