Throughout the history of the world economy, asset prices have endured bull markets and bear markets. It could be the case that we witnessed one of the shortest-ever bear markets in history recently when the FTSE 100 fell into bear market territory following its 20% decline from an all-time high of over 7,100 points. It remained there for less than a day before returning to apparent no man’s land.
In fact, this area between a bull and bear market has been occupied by the FTSE 100 for a number of months now. The index’s performance in that time has been hugely unpredictable, with volatility being high and investors overreacting to positive and negative news flow due to the fear prevalent at the present time. This situation seems likely to continue in the short run at least, since the share price falls of August and January are unlikely to be forgotten overnight.
Rates on the rise
As a result of this, the next bull market may be a little while off. After all, the market is still adjusting to the biggest change in monetary policy in almost a decade. The US interest rate may only have risen by a measly 0.25%, but it signals the end of cheap money and has caused a step-change in investors’ attitudes towards future growth rates. Today, most investors are less certain about global growth than they were even a few months ago.
Then there’s the China question. Its economy is likely to continue to slow in its growth rate during the course of 2016 as it transitions towards a consumer focus. Such an economy is unlikely to match previous growth rates, so as China’s GDP growth slows, investor sentiment could deteriorate and cause the FTSE 100’s price level to come under additional pressure.
However, these two challenges aren’t major ones. They’re certainly insufficient to cause a prolonged bear market and realistically, once the market adapts to the changes in China and the fact that the US economy simply doesn’t require low interest rates in perpetuity, a bull market is likely to start. With the valuations of a large number of FTSE 100 and FTSE 250 companies being very attractive, there’s scope for a major upward revision to valuations over the medium-to-long term.
It’s very difficult to accurately predict the timing of acceptance by the market of those two significant changes, However, it seems likely that the FTSE 100 will remain in no man’s land for the foreseeable future and this provides investors with time to seek out the best value opportunities for the long term.
80s revival?
Although the FTSE 100 enjoyed a bull market between 2009 and 2015 when it more than doubled, the reality is that the next bull market could be much, much bigger. The reasons? A strong US economy, an improving Europe, a Chinese economy where 326m new middle class are expected to emerge over the next 15 years, as well as low valuations across the FTSE 100. The next bull market could be akin to those of the 1980s and 1990s. The FTSE 100 rose by much more than 6.7 times between 1984 and the year 2000. As such, buying now for the next bull market seems to be a very sound move.