Investors could be forgiven for being somewhat puzzled by the performance of the FTSE 100 in recent weeks. In fact, since the market began its ‘yo-yo’ behaviour just over a month ago, it seems to be changing direction like the wind. One day it is up over 100 points, the next down a similar amount and so on.
The reason for such sharp movements in literally hours is that the FTSE 100 is being ruled by emotion. Market participants are nervous regarding the future outlook for China, the potential for interest rate rises in the US and the future of the global economy. As such, any piece of positive or negative news flow is being given far too much weight, with the reality being that news is never 100% positive or negative at any time.
Investing roulette
Clearly, the FTSE 100 is akin to an emotional wreck. For investors seeking to profit from its up and down movements in the hours, days and weeks ahead, there seems to be little means of assessing where it will go and by how much. As such, buying and selling it is akin to a quick spin of the roulette wheel.
However, for long term investors, such a high degree of volatility is a major ally. That’s because while the future of companies across the FTSE 100 remains bright, short term data is allowing investors to buy in at a much more appealing share price. Certainly, there is a realistic possibility that buying now at around 6000 points will lead to short term losses, but in the coming years the FTSE 100 is likely to trade at a far higher level.
A new era
In terms of the reasons for the FTSE 100 being an emotional wreck at the present time, the market appears to be anticipating a new era for the world economy. In the last few decades, the developed world has benefitted from gradually increasing levels of debt and a monetary policy which has been relatively accommodative. In other words, it has paid to take on debt and invest it in the economy. Now, monetary policy will tighten and for the first time in a very long while this could cause highly indebted nations, businesses and individuals to cut back on investment.
Similarly, the developing world has enjoyed a period of intense growth. China in particular has largely picked up the slack since the credit crunch and allowed the global economy to avoid recession. Now, though, the reality is that mid-single digit growth is likely to be experienced by China which, some investors fear, may be the catalyst to push the world economy into a troubled period.
Tremendous opportunities
While both of these assertions are a concern and investors should be mindful of them, the yo-yoing of the FTSE 100 in recent weeks is hardly a sensible response. For investors with patience, cash and a long term time-frame there are tremendous opportunities to take advantage, with an emotional wreck of a FTSE 100 being an investor’s best friend.