The FTSE 100 is on its longest-ever winning streak, boosted partly by a weaker pound. John Stepek looks at what’s behind its record-breaking run, and asks: can it continue?
The FTSE 100 the index of the biggest companies listed on the London Stock Exchange has been climbing now for 14 sessions in a row. That's its longest-ever winning streak. It may even continue today.
Whatever else the Brexit vote has done, it hasn't been a total disaster for the UK market.
So what lies behind the FTSE 100's record-breaking run?
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The FTSE 100 has enjoyed a record winning streak since the start of this year, and is now also trading at a record high. The market has been one of the strongest performers in the world, beating other European markets over the same period.
You might argue that it's about time. The FTSE 100 hasn't exactly been a star performer in recent years compared to other global developed market benchmarks. It might be at a record level now, but that's still barely above where it was at the peak of the dotcom boom.
The S&P 500 in the US peaked at 1,552 during the dotcom bubble. It managed to surpass that (just) in 2007. But since the financial crisis bust and rebound, it's roared back to life now it's trading above 2,300.
The FTSE 100, on the other hand, is trading at around 7,300, compared to a dotcom peak (set in 1999) of around 6,950. It took the market until 2015 to beat that 1999 record, and since then it's been a long slog from 7,100 to where we are now.
Sure, if you include reinvested dividends, investors have done OK. But the point still stands the FTSE 100 hasn't exactly been shooting the lights out during the 2000s.
And of course, if you're a dollar-based investor, then the gains haven't been as exciting. In dollar terms, the FTSE 100 is still down 6% since the Brexit referendum result, due to the drop in the value of the pound. At the same time, this isn't all down to Brexit the dollar has been exceptionally strong against most global currencies over this period and it's also of limited relevance to sterling-based investors in any case.
So why the big comeback now? The currency advantage is clearly the most obvious big driver here. As we've noted often in the past, many central banks have been trying to weaken their currency in recent years. A weaker currency has tended to lead to stronger markets Japan is probably the most obvious example of this in action, but it's happened elsewhere too.
Britain has just seen its currency tank following the Brexit vote, and there is no sign of the pound reaching a bottom just yet. Sterling was on the slide again earlier today dropping to below $1.20 at one point amid fears that prime minister Theresa May will somehow signal a "hard" Brexit when she speaks on the topic tomorrow (more on that in a moment).
But the thing about currencies is that there are winners and losers from every movement. A weaker pound is a pain if you're on holiday abroad, or buying in goods from abroad. But equally, it's good news if you earn money from overseas or you're trying to sell stuff abroad.
So the falling pound is good news for many of the companies in the FTSE 100. Plenty of these companies generate most if not all of their revenues in dollars, so the currency translation effect helps them. The weaker pound also makes exports more competitive.
As Russ Mould of AJ Bell points out, a couple of big themes emerge if you drill down into the biggest winners. Resources companies in particular are benefiting hugely from the rebound in metals prices. The miners earn money in dollars, while the price of commodities is holding up well. Silver miner Fresnillo one of the best-perfoming FTSE 100 stocks this year has done particularly well due to the rally in gold following a tough second half for 2016.
Housebuilders and "some domestically-focused names", such as Whitbread, have also made it into the top ten performers in the year to date. That's partly due to a rebound in sentiment as the UK has yet to fall off the Brexit cliff and into the abyss that most economists warned of before the vote.
Overall, the winners have been "cyclical" stocks ones primed to rebound amid better growth than expected - rather than "defensives".
The duds, meanwhile, include profit warners such as retail giant Next and publisher Pearson companies with specific issues, rather than those sharing a theme. The only obvious sector that's taken a hit is the real estate investment trusts.
There are two main reasons for that. Firstly, Brexit has lead to fears that commercial property in London in particular will take a hit. Secondly, demand for income stocks in general has been dented by hopes and fears that interest rates may rise and dent demand for stocks paying solid dividend yields.
Three trends that will continue for the time being
Can this continue? The honest truth is I don't especially care where the FTSE 100 as an index goes it's ultimately just a collection of stocks, most of them global in nature, built on fairly arbitrary rules. You don't have to invest in this particular index, any more than you have to invest in any one stock.
That said, I do think it's useful to break down its performance because I also see many of the factors driving the FTSE 100 higher as having legs. The mining rebound makes sense. The commodities are coming back from a long bear market and I don't see any reason for that to stop now, barring a crash in China, which I don't anticipate. So I'd stick with them.
I also think that jitters over the pound will continue until we have a clearer answer on the outlook for Brexit. Regardless of what actually ends up happening, the only sensible negotiating strategy is one that at least leaves the door open to a "hard" Brexit if no deal can be made. Indeed, the best strategy might be to come out with a specific date so that everyone and businesses in particular can start making plans for their very own "worst-case" scenarios.
Once the market gets a "hard" Brexit into its collective head, we might find that the only way is up for sterling. But we're not quite there yet, I don't think.
Finally, I reckon dividend stocks will probably struggle until interest rates (as represented by government bonds) reach a sustainably higher level. That may not be a lot higher than where they are today, but until investors have some sort of sense of where rates are going to "top out", they'll be cagey about investing for income.
So stick with miners, don't bet your mortgage on a higher pound (not quite yet), and while I do love a good dividend stock just be aware that you'll probably get a better chance to top up on these later in the year.
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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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