On New Year’s Eve 1999, the FTSE 100 was riding high. It was within 100 points of reaching 7,000 points and after a 12-year period of staggering growth, it felt as though the turning of a new century would see it rise further. However, it hasn’t been so. The FTSE 100 is lower than it was at the end of 1999. In fact, it has only surpassed 7,000 points for a handful of weeks in the last couple of years, before falling back.
Indeed, the last 17 years have been hugely disappointing for long-term investors. Dividends aside, the FTSE 100 has offered little hope in terms of capital growth. A key reason has been a large number of crises within a relatively short space of time. Certainly, there were problems with the economy that the stock market had to face in the late 1980s and 1990s, but they were arguably short, sharp difficulties that faded quite quickly.
However, the effects of the credit crunch are still being felt. In other words, it could be argued that the UK and global economies haven’t yet recovered from the biggest recession since the Great Depression. Interest rates are still at rock-bottom and are even tipped to move lower in the UK due to Brexit. And even a 0.25% increase in US interest rates causes investors to become increasingly fearful. This shows how little confidence there is in the global economic outlook currently.
Confidence gap
In fact, it could be argued that it’s confidence rather than tangible problems that has caused the lacklustre performance since 1999. The dotcom bubble was built on estimates and projections rather than increases in sales and profitability. So, while it was disappointing that the internet turned out to be an evolution rather than a revolution, the longlasting effect of it is confidence crisis, an unwillingness on the part of investors to become as excited and bullish about technological change as they once did.
Similarly, investors today are bearish on banks and resources companies. These are major contributors to the FTSE 100 and so have held back its performance in recent years. A number of companies in those sectors trade on incredibly low valuations that would once have signalled a buying opportunity for the long term. However, due to the fear and risk-averse attitude of today’s investors, such companies haven’t experienced high demand for their shares. As such, they look set to continue to drag on the FTSE 100’s performance until investor confidence improves.
One possible reason for the lack of confidence in the outlook for the FTSE 100 since 1999 could be improving communications. Today, information is more freely available than ever and is communicated quickly. This means investors are probably more knowledgeable today than they were last century. One effect of this could be ‘analysis paralysis’, whereby investors have so much information they fail to reach a clear decision. Therefore, investors may over time have become less bullish about the prospects of the FTSE 100 simply because they’re more aware of the risks it faces.
Clearly, a lack of confidence in the FTSE 100’s future has been a key reason for its poor performance in the last 17 years. However, this doesn’t mean that the next 17 will be equally tough. With a number of high quality companies trading at discount prices, now could prove to be a great time to buy and hold for the long term.
