Market milestones mean nothing

It’s been a good month for big round numbers in the markets. Last week, America’s Dow Jones index rose above the 17,000 mark to a new record. The S&P 500 is around 2,000 and Britain’s FTSE 100 is expected to hit 7,000 soon. But while these round numbers generate headlines, clearly there is nothing intrinsically significant about them.

We only consider them to be milestones at all because of “our brains’ attempts to impose order and assign categories to numbers that vary continuously”, says US journalist Carl Bialik.

It’s particularly easy for us to latch on to a round, eye-catching number and attach spurious importance to it – so it’s no wonder many articles have appeared about whether the market can keep going from these levels or not.

But the fact that we have reached a round number tells us nothing about the future direction of stocks.

What to bear in mind, says Fidelity’s Tom Stevenson in The Sunday Telegraph, is that it’s all about value, not price. “Try to forget” where an index or share has been, however impressive the figure, and focus on “a tangible valuation measure that’s hard to fudge”.

One of these, says Stevenson, is the dividend yield. And looking at it suggests there is still good value in the FTSE 100. There are 42 firms offering a yield of more than 3%; 24 paying more than 4%, and eight more than 5%.

That’s appealing, compared to getting 2.8% for lending to the government, “with no prospect of that income rising, unlike a dividend”.

Merryn

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