Why now’s a great time to invest in the FTSE

More and more people I talk to are getting nervous about the state of the markets.

“How long can things go on like this?” they ask.

I can understand why. It’s no secret that the FTSE’s current bull market is phoney – or at least, that it’s in response to artificial stimulus from the central banks.

And many investors now fear that with that stimulus set for withdrawal, the markets are due a plunge.

So are they? That’s the million-dollar question, and to answer it we need to take a step back and get the big picture.

I’ve been looking at the charts, and despite market jitters, it strikes me that now is actually a pretty good time to be investing.

Let me show you why, with helpful illustration from two charts in particular…

The bull market chart – FTSE 100, five years

FTSE 100 chart

As you can see from the chart above, since the markets turned up during the second quarter of 2009, we’ve seen a relatively orderly bull market.

How can I say that? Well, although they’re not particularly tight, the black tramlines define the bounds of a generally rising trend, also known as a bull market!

But since early 2013, when Ben Bernanke at the US Federal Reserve starting hinting that the Fed was to start tapering its mega-stimulus plan, the equity markets have lost a bit of their mojo. That’s where the red lines kick in.

While the black lines demonstrate a rising market, the red lines form a kind of wedge. It’s as if the FTSE knows exactly where it wants to go – somewhere around 6,800.

What’s going on there? Let’s dive in a little closer and look at only that last year…

The FTSE 100 over the last year

FTSE 100 chart

As we look at the FTSE over the last year, we see a market struggling to move higher – the same thing we noticed on the five-year chart.

There is a blue shaded area on this chart because I’ve also included what are called ‘Bollinger bands’, a tool used by technical traders to time trades.

Just think of them as a way to help you execute a very simple trading strategy (ie, buy low, sell high). If you’re looking to ‘buy the dips’, the time to do it is when the price falls out of the band – incidentally, exactly where we are right now.

Anyway, the market may not look primed for a sharp leg upwards, but the good news for investors like you and me is that it doesn’t look primed for a sharp fall downwards either.

That means that this is still as good a time as any to be an investor.

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Three reasons we’re not ready to crash

1. Returns elsewhere are pretty hopeless

As Tom Stevenson puts it in the Telegraph:

“When I look at the FTSE 100 today, I see an index in which 42 companies offer a dividend yield of more than 3%, of which 24 are paying more than 4% and eight more than 5%. These yields compare with an income of 2.76% for lending to the government, with no prospect of that income rising as a company dividend most likely will.”

2. For a serious fall, we need a reason

Any manner of things can smash confidence. Look no further than last week’s fears that Portugal’s largest bank, Banco Espirito Santo, was struggling to pay its debts. It was just like the euro crisis all over again – a bank in a small peripheral nation sending shockwaves through global markets.

But what we seem to have now is a bull market able to take the knocks – be they geo-political tensions, high oil prices, and even the odd banking mini-crisis.

3. Global stimulus is going nowhere

Here in the UK, the QE (quantitative easing, AKA money printing) plan has been on ice for two years now. In the US they’ve done the tapering talk, and now they’re doing the tapering walk.

But in Japan, a fresh monetary impetus has been ongoing since prime minister Shinzo Abe took the reins in 2013. Meanwhile in Europe, the head of the European Central, Bank Mario Draghi, looks set for a programme of stimulus too.

So what we’ve got is a global stimulus relay. Once one finishes, another starts!

And here’s the key point there – the capital produced in stimulus programmes is highly mobile. Stimulus in one place leads to asset price inflation in another one entirely.

So there’s little competition for equities in cash and bonds; we’ve got a strong bull market that has weathered a couple of storms; and we’re seeing new stimulus programmes around the world.

These are the reasons why the markets don’t look ready for a crash any time soon. Put simply, the markets are rigged, and I think they’re staying that way.

For you and me, now is as good a time as any to buy.

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2 Responses

  1. 14/07/2014, mikeT wrote

    I note that the UK QE has been on ice. What has BoE done with the bonds? Just held them? Dribbled some back into the market? Or is there still a whole lot to get rid of? Logically, this over-supply could drive markets down in the same way that under-supply drove them up. Can you comment on this, please, Bengt, as Ive yet to read anything informed, or even opinionated, on QE unwinding.

  2. 16/07/2014, Bengt Saelensminde wrote

    Sure Mike

    QE will never be unwound. The Bank of England will sit on this stuff right up until maturity. Interest received is now going back to the treasury – and the capital repayment goes back to the bank of england… an interest free loan effectively.

    Simple.

    Bengt

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