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Investors eye 8,000 as FTSE 100 records tumble

Investors eye 8,000 as FTSE 100 records tumble

As the FTSE 100 continues to set new records and investors eye an attack on the 8,000 milestone, some will look to the 'January effect' for a guide to the index's progress this year.

The UK blue-chip index has kicked off the year in a similar vein to its start to 2017. This time last year, the index was in the midst of a record-breaking run of 12 consecutive closing highs.

While progress hasn't been as spectacular this time round, two closing all-time highs this year, and a third within touching distance today, are not to be sniffed at.

Look further back to December's Santa rally, and the index has notched up six all-time highs in the past three weeks. That has left the FTSE 100 just 3.6% short of the 8,000 mark, a milestone experts believe it can reach.

'Markets are driven by supply and demand,' said Richard Stone, chief executive of The Share Centre. 

'At the moment the forces of demand are winning the day and driving equity prices higher. I believe this is likely to continue and could drive the FTSE 100 index above 8,000 for the first time in the index's history.'

Russ Mould, investment director at AJ Bell, agreed, saying the index could launch a concerted attack on the milestone this year.

Despite the FTSE 100's run of record highs, it has actually underperformed global stock markets over the last two years. Mould said this would be 'an instant red rag to contrarian bulls', adding that this run also hinted at the index's relative cheapness  compared to other markets.

'Unloved often means undervalued and the UK is not expensive relative to its international peers or its own history on an earnings basis, with the FTSE 100 trading on around 14 times consensus earnings estimates for 2018,' he said.

This has also helped to keep the yield offered by the index high at 4.3%, another attraction to investors that could propel the stock market higher. 

'Such a yield could be the source of support for the index and contribute a healthy percentage of total returns from UK stocks in 2018,' he said.

'Granted, dividend cover is thinner than ideal, but the higher the oil price goes the safer the dividend yield from BP (BP) and Shell (RDSb) becomes and they represent nearly a fifth of total dividend payments between them.'

The ‘January effect’

As the FTSE 100 records continue to tumble, some investors will be looking to the 'January effect' for a guide to the index's progress for the year.

This theory states that if returns are positive in January, the market will return further gains over the rest of the year. This has happened 79% of the time since 1984.

Analysis from Fidelity International shows that since its inception in 1984, the FTSE 100 has risen in the first month of the year in 19 out of 34 years, and in all but four occasions has gone on to record further gains between February and December.

'This is an old stock market adage that states "as goes January, so goes the year",' said Tom Stevenson, investor director for personal investing at Fidelity.

'As far as short term buy signals go then, the ‘January effect’ seems to have a reasonably reliable hit rate.'

So far the signs are good, even if, when set against the succession of all-time highs, the FTSE 100's gain so far in January is a rather underwhelming 0.4%.

But Adirna Lowcock, investment director at Architas, cautioned that while the 'January effect' served as a strong predictor of returns for the rest of the year prior to 2000, since the turn of the millennium the trend had deteriorated.

'The return of the bull market since the financial crisis hasn’t seen a return of the January effect. In fact our analysis shows the effect has decoupled even further and now there is a 50/50 chance of the effect holding true,' he said.

'This makes sense as there is no logical reason why the performance of stock markets in January should have any bearing on the next 11 months.  For example, we know too little about how this year will unfold; will Brexit negotiations go smoothly, could Trump be impeached, might the Italian elections produce an anti-EU result? There are too many unknowns which could change the outlook and performance of markets.'

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