FTSE 100 breaks above 8000: but where to next?

The FTSE 100 broke above the 8000 for the first time in its history this week, leaving investors wondering if it has legs for a further rally – and, how can it perform against a broader negative economic picture for the UK marked by high inflation, low GDP and high interest rates?

Interestingly, large stock market indexes like the FTSE-100 are among the safest long-term bets in the market. While they do fluctuate on a daily basis, in the medium to long term they move higher in a fairly persistent fashion. This is not only the case for the FTSE indexes, but also other majors like the Dow Jones Industrial Average, the S&P 500, NASDAQ and all the major European and Asian indexes.

For instance, if you had invested in the FTSE-100 since it first launched you would have made a total return of just over 720%. The largest rally the index ever had was on 24 November 2008 when it jumped 9.8% in the space of one day. (For market history buffs, this is when the 2008 crisis was beginning to take grip and the night before the US government agreed on a rescue plan for Citigroup).

The highest daily loss drop was 12.2% in October 1987. It is worth noting that in the earlier years the index moved higher faster than it did over the last two decades. For instance, it made the move between 3000 and 4000 over a period of three years between 1993 and 1996, and the move between 4000 and 5000 came in the 12 months between 1996 and 1997. However, since 1998 the progress became slower. It took 17 years for the index to rally from 6000 to 7000 and then another eight years to reach today’s level of over 8000.

Why the FTSE is not a reflection of the UK economy?

The FTSE-100 is not a good reflection of the current state of the UK economy, in the same way as the DJIA does not paint the correct picture of what is happening in the US. The main reason is that the FTSE-100, like the DJIA and other large indexes, is made up of the most profitable companies in the country. Once a stock starts performing badly it is moved out of the index to be replaced by stronger contenders.

This process happens on a quarterly basis, with the three weakest companies relegated out of the FTSE-100 and five of the lowest performers reshuffled out of the FTSE 250. In one of the most recent moves Abrdn (previously Aberdeen Asset Management) LON:ABDN, Hikma Pharmaceuticals LON:HIK, Howden Joinery Group LON:HWDN made way for medical equipment company ConvaTec Group LON:CTEC, the world’s oldest investment trust F&C Investment Trust [LON:FCIT], and oil and gas business Harbour Energy LON:HBR.

ConvaTec shares rallied over 10% over the last 12 months while Harbour Energy rose 30%. F&C had a less then stellar performance, making a loss of over 10%. Shares in the three worst performers all dropped around 40% over the course of the year.

Of the original 100 companies which made up the index only around 20 still remain a part of it. These include British American Tobacco LON:BATS, BP LON:BP., Associated British Foods LON:ABF, Barratt LON:BDEV, GSK LON:GSK, Prudential LON:PRU, Reckitt Benckiser LON:RKT, Shell LON:SHEL, Unilever LON:ULVR, Whitbread LON:WTB, Tesco LON:TSCO and Barclays LON:BARC, and as long-standing constituents of the index deserve a separate look.

In the meantime, the FTSE is back down below 8000, trading at around 7985.88 at time of writing. But even with that decline it is still up 1.72% on the month and 6.26% on six months. The returns are not massive, but fairly consistent and solid, even at times of recession.

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