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As the FTSE 100 hovers around 7,000, when will it hit 8,000?

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On Friday, 16 April, the FTSE 100 index closed at 7,019.50 points. This was the index’s first close above 7,000 since February 2020. Yesterday, the Footsie ended just 0.1 points above 7,000. As I write on Tuesday, the index is down 80 points (1.1%) and seems likely to close below 7,000 again.

The FTSE 100 crashed in 2020

In 2020, the FTSE 100 started well, peaking at 7,674.60 on 17 January. This left it roughly 200 points (2.6%) down from the record close of 7,877.45 on 22 May 2018. Then, as Covid-19 infections exploded, the index crashed to close at 4,993.90 on 23 March 2020. I call this low point for UK stocks ‘Meltdown Monday’, because it also marked the beginning of a huge relief rally. Today, the Footsie has soared over 1,925 points since Meltdown Monday, leaping by almost two-fifths (38.6%).

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The Footsie flirts with 7,000

Due to a psychological bias called ‘anchoring’, we strongly favour round numbers. That’s why items cost, say, £9.99 instead of £10. Our brains see a ‘bargain’, purely because the price tag is a penny less than the £10 mark. It’s also why investors are obsessed with certain stock-market index levels (and why media outlets enthusiastically report these milestones being reached).

I remember the universal disappointment when the FTSE 100 closed at 6,930.2 on 31/12/99, 70 points short of the ‘important’ 7,000 mark. Pundits confidently predicted the Footsie would soar past this milestone within days. Instead, the index more than halved, closing at 3,287 on 12 March 2003. It then more than doubled by June 2007, before almost halving again by March 2009. The FTSE 100 finally exceeded 7,000 in the spring of 2015, taking 15 years and four months to get there. I call these 15 years ‘the Big W’, which visually describes the index’s path from 1999 to 2015. 

When will the FTSE 100 hit 8,000?

Today, the FTSE 100 is almost exactly where it stood at the end of the previous century. Thus, it has made no capital gain in more than 21 years. However, the vast majority of Footsie companies pay dividends to shareholders. Add in reinvested dividends and the index has returned around 115% to investors since 1999. That comes to a compound annual return of nearly 3.7%, which is better than nothing. However, with dividends reinvested, the mid-cap FTSE 250 index is up over 520% over the same period, completely thrashing its big brother.

Today, my big question is when will the FTSE 100 hit 8,000 points? Alas, it is horribly difficult — if not impossible — to predict the future. Of course, share prices and market indexes don’t move in straight lines. They are volatile, moving up and down almost randomly at times. Indeed, the FTSE 100 has most closely resembled a giant sawtooth this millennium. That said, and at a push, I would imagine that the Footsie could add another 1,000 points — 14.3% — over the next three years.

What’s more, as a former mathematician, I’m going to let maths do my thinking for me. Here’s how long it would take the FTSE 100 to climb from 7,000 to 8,000, based on various compounded yearly returns (CAGR is compound annual growth rate).

CAGR
Time to hit 8,000
1% 14 years
2% 7 years
3% Under 5 years
4% Under 4 years
5% Under 3 years

Thus, if the FTSE 100 index grows by 5% a year compounded, then it will take under three years to rise from 7,000 to 8,000. At 3% a year, it would take just short of five years. As for me, I keep backing UK value stocks to be one of the best-performing assets of the next decade. Let’s see if I’m right…

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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