Will the FTSE run out of steam?

What a start to the new year. Britain's blue-chip index, the FTSE 100, hurtled to a new record high above 7,200 on the first trading day after the holiday. That crowned a 14% jump in 2016, a better showing than any of the major continental indices. It included a near-20% increase since the Brexit vote in late June. Nonetheless, it's interesting to note that the latest record is only marginally above the index's level in late 1999, the dotcom-era peak. "That's hardly stellar growth over a 17-year period", says Iain Dey in The Sunday Times. Thanks to two huge bear markets, the chart of the past 20 years "looks more like the peaks and troughs of a heart-rate monitor".

So what next? "It's a lottery whether stockmarkets go up or down in the short term", as Patrick Connolly of Chase de Vere notes (see below) in The Sunday Times. But that doesn't stop strategists having a go at short-term predictions. This year they have been cautious with their 12-month forecasts on average so cautious, in fact, that the average forecast for December 2017 has already been eclipsed.

A recent survey of 22 investment banks and other financial services providers by UK.Investing.com produced an average predicted year-end level of 7,015 (based on a range of 6,200 from Anthilia Capital Partners to 7,650 from Lex van Dam Trading Academy). Another one by The Sunday Times, which surveyed five other asset managers and financial service groups, pointed to an average of 7,240.

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The good news is priced in

A repeat of last year's stellar performance looks unlikely, however. The index is "largely immune to worries about the impact of Brexit on the UK economy", as Jeremy Warner puts it in The Sunday Telegraph. Indeed, it has benefited from them. The key driver is sterling, which at one stage last year had lost 15% of its trade-weighted value (against a basket of major trading partners' currencies).

As the FTSE 100's constituents make more than 70% of their sales abroad, and many report in dollars, a weak pound and a strong greenback are a boon. The commodities recovery, notably the oil-price bounce, has also helped. This is due to the index's unusually heavy exposure to raw materials thanks to the inclusion of BP, Shell, and the big miners.

These factors, however, have surely been priced in by now: Barclays, for instance, is pencilling in a 19.5% increase in British earnings per share in 2017, by far the biggest improvement of any major stockmarket region. A further big boost from the pound sliding is unlikely, as we noted before Christmas. Indeed, the latest talk of a soft Brexit has given it a lift, and the enduring solidity of our economic data is boosting it too. In any case, the focus in foreign-exchange markets has shifted to the dollar.

The global environment, moreover, will be crucial. The eurozone crisis could well flare up again in 2017, especially if the far-right wins the presidency in France. "If the markets seriously come to doubt the integrity of the eurozone, then the euro may fall sharply and the pound/euro rate could rise significantly," says Roger Bootle of Capital Economics in The Daily Telegraph.

Trump poses a danger

Markets will also be watching Donald Trump's first moves with bated breath. The trouble here is that they have probably been counting their chickens before they've hatched, says Jeremy Warner. His promised fiscal stimulus "really only has the capacity to disappoint", thanks to the many fiscal hawks in Congress. There is also the scope for "catastrophic damage should he go through with his threats to tear up the global trading system". Having tuned out the possibility of bad news, equities could be in for a nasty surprise. Wherever we end up in December, says Holly Mackay of Boring Money, the odds are that "we'll jump around like a kangaroo on the way".

Treat forecasts with extreme caution

At this time of year, the financial press is full of strategists' stockmarket forecasts for the new year. But "here's the blunt truth", says Alex Dumortier on Fool.com. "No one has any idea what the stockmarket will do over 12 months". Not Janet Yellen, not Warren Buffett who has often said as much and certainly not a fund manager or an investment bank.

Note, for instance, that US equity strategists accurately predicted a 9.5% gain for the S&P 500 index in 2016, as Oliver Renick notes on Bloomberg.com an unprecedented feat in data going back to 2000. But all that really happened is that "stocks finally did in 2016 exactly what strategists always say they'll do". Since 2000, the analysts' average prediction for the year ahead has been a gain of 9.3% for the S&P. And it's not as though they stuck with it: by midyear, spooked by the market slump in early 2016, they had slashed their expected annual gain to just 3.2%. This highlights one reason analysts tend to get it wrong: they base their judgements on the recent past, so they have missed bear markets and underestimated rebounds. They often cluster together because if the group is wrong, no individual is likely to be sacked. They are also tendentiously bullish because they often represent companies that have stocks or funds to sell.

Finally, while we know that valuations are a good indicator of stocks' performance over the longer term (see page 7), a 12-month forecast depends greatly on the market's mood, and the factors that can produce short-term shocks or bouts of euphoria and investors' reaction to them are very hard to predict. Take the forecasts with a bucket of salt.