As The FTSE 100 Inches Towards 7000, Where Will The Next Stop Be: 7500 Or 6500?

As the FTSE 100 approaches the 7000 mark, I’ll take a look at where it could go from here.  Will it push on to 7500?  Or correct to 6500?

Cutting Through The Noise

As I write, the index is steady at 6927, just off its high of 6949, which it achieved last month.  I find this strength interesting given all of the geo-political goings-on around the world: Greek indebtedness, the crash in the price of oil and unrest in several countries across the world to name but a few… it makes me wonder where the FTSE 100 would be currently if none of the above-mentioned events had come to the fore.

Not Too Expensive

I think the reason that the FTSE 100 has held up so well recently is the fact that it isn’t too expensive.  Indeed, with a forward P/E of around 16 and yielding 3%, the market doesn’t strike me as being expensive.  Compare this to a P/E of around 30 when it peaked in 1999 and I think you’ll agree that it has a long way to go before it becomes as expensive as that.

Add pensions freedom and the ability of parents to transfer child trust funds from 6 April 2015 and I don’t think that it would be out of the question for us to see the FTSE 100 rise to 7500 this year.

Fools Rush In

Now for the bad news.

Whilst it is quite possible for the FTSE 100 to push on from here, there are a number of factors that could combine to give investors a rather rude awakening:

• Political uncertainty — with just 62 days to go until we go to the polls and another hung parliament predicted, investors could be in for a shock if this major political event creates uncertainty. As we all know, markets hate uncertainty.  With the FTSE 100 floating around 7000, we could see some steep falls;
• Financial uncertainty — Greece recently bought itself a few more months, but there are a number of commentators questioning how far the can will be kicked down the road before they have to admit defeat and leave the Eurozone.  Whilst Greece on its own wouldn’t be the end of the world, I think that the uncertainty of other countries also deciding to default on their debt and leave could cause market-wide panic.

These are just two of a number of known issues. There are also unknown events that can derail markets and cause widespread panic.

Take It Steady

For me, I would be very hesitant about putting a lump sum into the market at these levels.  I would, however, have no issue feeding money into the market on a monthly basis.  It is true that you would buy high on occasion, but you will also see some lows and be more aggressive with your dry powder when you feel that the market is cheaper.