The headlines this morning are full of the news that the FTSE 100 index finished yesterday (24.02.15) at a record high of 6950, surpassing the previous high of 6930 set on 30.12.99. What does this really mean?
The first point to note is that the index is simply a number, an aggregation of the market capitalisation of certain companies, many of whom are different to the ones in the index in 1999; it takes no account of inflation which in terms of the Retail Prices index (RPI) has been 52.7% since 1999. In other words to capture the same real value as in 1999, the index would have to rise to 10,579.
Perhaps most importantly, in terms of valuation, or ‘expensiveness’ the situation now is completely different to that in 1999, which was the height of the dot.com bubble. Back then the index was on a price/earnings (P/e) of 29.9 and a dividend yield of 2.1% per the FT; today the P/e is stated to be 17 and the yield is 3.4%. On these numbers the earnings of the FTSE 100 constituent companies have increased by 76.7% since 1999 and dividends have gone up 62%. So the index is considerably cheaper in fundamental terms than it was in 1999.
It may seem pretty drastic to have taken 15 years to re-capture this level but it has not been all bad news for investors in equities; taking into account re-invested dividends, the so called total return on the FTSE 100 has been about 67.9% since 1999, a little ahead of inflation.
The final point is that the FTSE 100 is made up of very large, often international companies. The FTSE Small cap index, much more reflective of UK based companies is about 50% above its level of December 1999.
So, we welcome the headlines as possibly boosting investor confidence but pay no attention to the record. The fact of the record itself, as hopefully we have demonstrated above, means very little; neither that this is necessarily a time to buy nor sell. We will keep looking at the Facts in terms of fundamentals and relative valuations to determine asset allocation between cash, bonds and equities.