The FTSE 100 is getting close, very close to a record, does that mean all is well?
In the build-up to an Olympic Games, if Usain Bolt runs 100 metres in under 9.80 seconds you know he is on form, a world record may be on the cards in the final. It feels a bit like that with the FTSE 100, the index of leading shares listed in the UK. To put it in 100 metre terms, it is running under 9.80 and maybe be limbering up for a record.
On Thursday 22 September, the FTSE closed at 6,911.40. This was just a fraction shy of the year high – set in August, and a mere 211.34 points short of the record set on April 27 last year.
If these things interest you, the FTSE 100 closed at 6,930 on December 30 1999, a record that stayed in place until last year?
It may seem encouraging that the FTSE 100 is riding high, but bear a few things in mind.
For one thing, The FTSE 100 is made up of a lot of multinational and indeed foreign firms that derive much of their turnover abroad. For another thing, the fact that yesterday the index closed 20 points shy of the 1999 record – 16 and a half years ago – is not so impressive.
For a third thing, some argue that the index has been distorted by the policies of central banks. The argument continues that the latest readings of the FTSE 100 are, as much as anything, a function of quantitative easing, and that once interest rates rise, the index will go into a nosedive. There is a problem with that theory, more of that in a moment.
If you want to look at a stock index that gives a closer correlation with UK plc, turn instead to the FTSE 250, which tracks the next 250 biggest companies. The story of this index over the last 16 years looks quite different. But like the FTSE 100, the FTSE 250 is close to setting a new record. It passed its 1999 record in 2005, it peaked in June 2015, with a score of 18,263. Last night it closed at 17,987.
Both indexes are within one good day’s worth of trading of the record.
But are the indexes being distorted by low-interest rates and QE? Will shares crash if rates go up, and return to more normal levels?
There is a point that stock market bears and cynics overlook. As a general rule, the stronger the economy the stronger the stock market. Interest rates will only rise if the economy gets stronger, and it would be odd indeed if stock markets crashed as the economy improved.