The FTSE 100 ended the week in a close-but-no-cigar fashion, just short of its all-time high but is on course to plant its flag in a new pinnacle next week.
It may seem strange for the index to be butting up against its historic ceilings now, amid a major consumer squeeze and either a recession or at least a screeching economic slowdown, twitnned with slumps in Europe and central banks hiking interest rates.
Or, to royally mangle a famous Winston Churchill quote, this article is looking to learn from history why the Footsie is about to repeat itself despite these seemingly doomed economic times.
(Talking of royally mangling things, the last record was set in May 2018, which like January 2023 saw lots of headlines about Prince Harry, as that was when he married Meghan Markle – thanks Wikipedia!)
2018 highs: 7800 and 7900
London’s blue-chip index has this week been hovering around similar levels above 7800, a level first breached in January 2018, when US stock markets were also setting highs, with the Dow Jones topping 25,00 first the first time and Japanese shares hit quarter-of-century highs.
Stocks on the FTSE had been rallying for the preceding two years, since hitting a low in early 2016 amid the run-up to the Brexit vote.
The index then dipped sharply over the next few weeks and scraped below 7000 in March before charging back up to set the record high that still stands today on 22 May 2018, when it hit an intraday high of 7903.5 and notched a record close at 7877.45.
Looking back at the time, the pound endured big falls due to Brexit, having dropped to US$1.20 from US$2 in late 2007, though in late 2017 and early 2018 the UK economy was enjoying better times.
A weaker sterling boosts UK exports and the accounts of British companies that make most of their sales abroad, which was hailed for giving the Footsie’s high proportion of multinationals a big leg up, especially dollar earners, and attracting bids for the likes of Sky and Shire at the time.
As recently, oil prices were also helping, with Brent crude rallying to US$80 a barrel to buoy the likes of BP PLC (LSE:BP.) and Shell PLC (LSE:SHEL, NYSE:SHEL).
As Barclays' head of investment strategy said at the time, the FTSE was not his team’s favourite pick due to various factors: “The most important of these is that in a world where the cyclical prospects remain bright, outside of its commodities exposure, the FTSE leaves you with relatively less skin in the cyclical game than other stock markets.
“Meanwhile, its banking sector lacks the recovery appeal of its more persistently troubled continental European peer group.”
Some investors at the time felt the FTSE’s and US stock market highs at the time were a sign of “irrational complacency” ahead of an expected rocky road expected later in 2018, while there was also talk of the risks of a “melt-up” where share prices were out of kilter with reality.
Across the Atlantic, US markets were being buoyed by then President Donald Trump’s corporate tax cuts from 35% to 21% and shrugging off rumbles of a trade war with China (which may ring some bells).
2015 sees 7000 breached
Turning back the clock further, the previous noticeable crests on the chart were May 2015, February 2011 and July 2007.
March 2015 was when the 7,000 beachhead was taken for the first time, with no sign of Prince Harry but a solar eclipse instead, and preceded by George Osborne’s pre-election budgets, which turned out to be the final Budget of the Conservative-Lib Dem coalition government.
Stattos noted that it took the index seven months to break from 5000 to 6000 and another 204 months to add break the next “psychological barrier”, not helped by around half the index’s constituents changing during that time.
Construction company CRH dragged the index higher on the day in 2015, backed by the index’s large portion of commodity stocks and the UK listing of bottler Coca Cola HBC. Shell and HSBC were the two highest valued companies at the time.
2007 highs as credit crunch shrugged off
The first half of 2007 is pretty well known as the run up to the global financial crisis, but stock markets continued to be buoyant (with the FTSE rising above 6000 in late 2006 and apart from a small wobble not falling below that market until early 2008) despite house prices starting to fall, subprime lender bankruptcies, big hedge fund failures and the emergence of a credit crunch that in September 2007 saw the collapse of Lehman Brothers and a run on British bank Northern Rock.
The FTSE pretty much shrugged, in fact finishing the month of September 2007 higher than it started.
Before that the final years of the dotcom bubble saw the Footsie keep stretching to new maximums, first topping 6000 in July 1998, deflating sharply to below 4700 that same year and then with a second wind bloating back up above 6900 in late 1999 with the good times beyond 6000 lasting another fifteen months before the bubble truly burst and sub-4000 was the norm for the 12 months from May 2002 into 2003.
2023: how high can we go?
Looking to what reasons there are this month for the FTSE nearing a new pinnacle, it comes after a year when the index was the third best performing global index in the past year, delivering a small gain while others plunged.
The Bloomberg consensus forecast is for the FTSE 100 to rise 0.6% this year, with Citi the most optimistic at 11%, Goldman Sachs (NYSE:GS) and Barclays in the middle eyeing around a 1% gain, and T&D Asset Management the most pessimistic, predicting a 15.4% plunge.
The London index’s lack of highly valued big tech stocks – the same lack of excitement that has seen it trade roughly sideways for over five years – is part of its current appeal.
Here’s Neil Wilson at Marketc.com: “A fresh all-time high for the index in this kind of macro environment probably reflects a bit of defensiveness among global investors, a hunt for yield, relative cheapness and a weaker pound (in dollar terms we are a long way off the all-time high), a belief the Fed is almost done with rate hikes as inflation peaks, and hopes that China’s reopening will drive the commodity and energy sectors.”
And Russ Mould at AJ Bell: “Smashing through this level would give overseas investors another reason to start looking more seriously at UK stocks. After the Brexit vote, UK stocks were off the menu for many international investors and valuations plummeted. This remained the case for some time until some canny players realised the opportunities to be had, leading to a wave of takeovers – decent businesses picked up on the cheap… Now if the FTSE 100 breaks a new record, it’s another trophy in the cabinet for the UK and a reason to shout from the hilltops that the market is not as dull as people think.”
Sophie Lund-Yates at Hargreaves Lansdown: “The UK market has also been buoyed by a spate of positive results this week from consumer-facing retail names. Ultimately, it seems that economic activity and discretionary spending is holding up far better than expected… The recent rally shouldn’t be ignored, but there are still things to consider. Core inflation remains elevated in the US and the UK, which means a meaningful change to economic policy is unlikely. As consumers begin to recoup some of the extra spending from over Christmas, it’s highly likely we’re going to see economic contraction and earnings downgrades in the short-term.”
Chris Beauchamp at IG: “Housebuilders and retailers have found plenty to be cheery about, if only because things seem to have brightened considerably for the UK economy in the last few months. The second half of the year still seems murky, as everyone has been at pains to point out in their trading updates, but for now the situation seems a lot better than feared.”