Is The FTSE 100 About To Enter A Bear Market?

During the course of 2015, the FTSE 100 has hit a record high of 7,100 points but, since then, has fallen back to below the level at which it started the year. In fact, the index is now down almost 2% for the year, which is clearly very disappointing.

Moreover, it is somewhat surprising, since the outlook for the index has never looked so positive. The UK has overcome the savage problems created by the credit crunch: employment is on the rise, wages are increasing at a faster rate than inflation and business confidence is also improving. As a result, UK-focused stocks are performing well and delivering strong increases in profitability.

However, global problems remain significant and are weighing the FTSE 100 down. Earlier this summer the Greek debt crisis seemed as though it may not be successfully concluded and, while it is not yet a foregone conclusion, it seems likely that Germany and its European partners will allow Greece another chance at rebuilding its economy. As a result, investor sentiment remains somewhat cautious regarding the prospects for the Eurozone, with doubts surrounding its medium term growth prospects likely to weigh on investor sentiment moving forward.

Furthermore, the devaluation of the Chinese Yuan came as something of a surprise for many investors and has caused the FTSE 100 to shed further points. And, with further devaluation likely, it is probable that market sentiment will continue to be hit in the months ahead – especially since there are fears that China’s soft landing will turn into a rather more challenging period for the world’s second-largest economy.

In addition, investors are also readying themselves for the inevitable interest rate rises on both sides of the Atlantic. While in the UK the Bank of England has been at pains to point out that rate rises will be slow, their US counterparts seem to be more willing to raise them at a faster pace judging by the comments of some members of the Federal Open Market Committee. As a result, the next few years could see a significant change in the make-up of the US and UK economies and this fear of a known unknown could cause investors to be somewhat more cautious than they have been in previous years.

Despite the above challenges, it seems unlikely that the FTSE 100 is on the cusp of a bear market. This would require a fall of a further 800 points to give a 20% fall from the 7,100 peak earlier in the year. And, while the Eurozone’s problems are likely to drag on and China is facing a period of slower growth than has been achieved in the past, neither problem appears to be sufficient to cause a major and sustained sell-off by investors in the short run.

Meanwhile, interest rate rises are going to be a fact of life over the medium to long term and, while they may rise at a faster pace than is currently being forecast, Central Banks are very unlikely to be anything but cautious for fear of killing off the economic recovery. That’s because the credit crunch remains firmly fixed in their minds and, as a result, it seems likely that an accommodative monetary policy will remain in place over the medium to long term.

So, while there are dangers facing the FTSE 100, they do not appear to be sufficient to push the index into a bear market. That makes the present time a good opportunity for long term investors to buy high quality stocks in a range of industries.

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Peter Stephens 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.