THE big news here in the UK is the approach of a new all-time high for the FTSE 100 index. The UK benchmark is a particular beneficiary of the positive drivers of markets in a notably strong start to the year for investors
What’s fuelling the FTSE 100’s surge?
The UK stock market’s blue-chip index is heavily weighted to the energy and commodity stocks which are the most obvious beneficiary of the unexpected re-opening of the Chinese economy. China’s abrupt abandonment of its zero-Covid policy is bad news in the short term, as infection rates soar, but further out it promises strong growth in the world’s second biggest economy. That’s what investors are focused on.
Stock markets generally are also increasingly positive about the outlook for inflation, with last week’s unexpectedly big fall in US inflation to 6.5% setting the scene for this week’s CPI print here in the UK. Inflation is probably more entrenched, and certainly higher, here than over the pond but the trend appears to be downwards pretty much everywhere.
That points to a lower and sooner peak for interest rates and this is the second key driver of the January rally in markets. Put the two together and it is perhaps not surprising that the FTSE 100 is within a whisker of its previous high, set in May 2018, of 7,877.
FTSE 100 one year chart
It’s probably worth pointing out, however, that at a new all-time high the FTSE 100 will still be less than 15% higher than the level it traded at in December 1999 at the peak of the dot.com bubble. The UK benchmark has been a relative laggard over the 23 years since then. During that same period, for example, the S&P 500 has risen by 150%. At last year’s peak, Wall Street had trebled since 1999.
But to be fair to the FTSE 100, it is a very different kind of index. With a dividend yield of 4% currently, the UK market pays out a lot more of its value each year to investors. Anyone who reinvested that dividend income rather than spending it would have enjoyed a much better total return than the headline level of the FTSE 100 would suggest.
What else is driving markets?
The other key driver of markets for the next few weeks will be corporate earnings. Profit forecasts have held up surprisingly well in the context of looming recessions on both sides of the Atlantic and even after recently reduced expectations, earnings are expected to be flat this year, with a bounce back still being pencilled in for 2024.
That may turn out to be too optimistic if, as expected there is a sharp economic slowdown this year. Recessions usually coincide with a fall in earnings so the expected profits path would be a serious outlier in historic terms. For now, the markets are still in glass half full mood. To stay that way, they need earnings to stay positive.