After rising 14% last year, I suspected the FTSE 100 would be in for a bumpy ride in 2014.
I’ve been bearish since the spring, nervously expecting a meltdown at any point. I thought the sheer weight of geopolitical and macroeconomic misery would bring the market to its knees.
Yet it hasn’t happened.
Worried? You Will Be
Just look what the world has thrown at investors this year. A slow motion Chinese hard landing, which has hammered commodity prices.
A deflating eurozone, kept alive only by the promise of monetary stimulus that never fully arrives.
Vladimir Putin’s attempts to rewrite European borders, which has forced Europe to hang (reluctantly) tough on sanctions, and risk gas export retaliation in return.
The Middle East, with by the horror rise of Isis and the prospect of wider sectarian war.
QE tapering in the US, which should shrink $85 billion of monthly bond purchases to zero, possibly by next month. The monetary life support is being removed. Interest rate hikes could follow.
Wall Of Worry
So far, the FTSE 100 has taken all these threats on the chin.
It has even shrugged off the prospect of a constitutional shake-up in the UK, a threat that hasn’t abated following the No vote in Scotland, as the English increasingly demand their say.
The independence bug is sweeping Europe, from Catalonia to the South Tyrol, threatening the last remnants of the post-war settlement collapse. Yet the index holds.
It has been held back by disappointing company earnings, but it hasn’t collapsed.
Any Old Iron
Commodity prices are down. Today, a barrel of Brent costs around $98, down from $116 in July.
The iron ore price is down 40% this year to around $83 a tonne, hitting margins at smaller producers and forcing some into administration, although Rio Tinto and BHP Billiton are big enough to take the hit.
Plenty of FTSE 100 listed stocks have tumbled this year, including Barclays, GlaxoSmithKline, Tesco and Morrisons. Yet the index is only slightly off its 52-week high of 6878.
It seems nothing can stop the FTSE 100 right now. It is up a modest 3.2% over the past 12 months, but with the index yielding 3.4%, that provides a decent total return of 6.6%.
This is far more rewarding than any savings account. So why has it been so resilient?
Waiting For The Worst
One reason investors have been so cool under fire is that alternatives, such as cash, are dismal.
Investors also believe they have a bullet-proof jacket, handed to them by central bankers. If markets wobble, the US Federal Reserve will step in to save the day (again).
In Europe, where investors are waiting for Mario Draghi at the European Central Bank to unleash his long-awaited €1 trillion of QE.
The worst things get, the better markets like it.
Only the prospect of a US base rate hike causes serious market tremors.
Central bankers are the one thing that can stop the FTSE 100 and global stock markets, and they’re not brave enough, or daft enough, to be hawkish right now.
So the only FTSE 100 has a backstop. Trading at 13.5 times earnings, it doesn’t even look overvalued.