It feels like it has been a challenging few months in the market. Actually, although the benchmark of leading shares, the FTSE 100, is down 3% in 2022, it still stands 4% higher than it did a year ago. Not only that, but it is only around 5% lower today than its all-time high. So the market may be performing better in reality than it can sometimes seem.
Looking forward for the FTSE 100
A 4% rise over the course of the year is better than a fall, but it is still modest stuff. Inflation is running at more than double that rate of annual increase currently. So if I put money into the FTSE 100 a year ago, I would have lost value in real terms by now.
Some investors are worried about the prospect of a stock market crash. But my mind is on the question of when we can expect the FTSE 100 to go through a rapid growth phase again. Here are a couple of things I would look for.
Innovative businesses
One thing I think sets the FTSE 100 apart from the FTSE 250 and key American indexes like the NASDAQ is the lack of real innovation among many of the companies.
That can actually be helpful as an investor at a time like this – the tech heavy NASDAQ, for example, has tumbled 18% over the past year. Even the FTSE 250 is showing a loss of 13% over that time period. Buying shares in slow moving and well-established firms can mean they benefit from having defensive businesses even amid a broad economic downturn. But equally, in the long term, I expect the NASDAQ (up 89% in the past five years) to outperform the FTSE 100 (down 1% in the same period).
So I reckon one indicator the FTSE 100 could be about to explode in future could be if it starts to include more tech companies or other innovative businesses with real promise. At the moment, I feel its limited tech footprint is illustrated by Sage. I like Sage’s business model and would happily own its shares in my portfolio – but I hardly expect the growth from it we might see from Alphabet or Microsoft.
Financial recovery
One thing that has helped the FTSE 100 in the past year is the strong performance of oil and gas companies. Two of the index’s 10 biggest members are Shell and BP. Their shares have risen 49% and 36% respectively in the past year.
But a key sector for the index is financial services. It is packed full with members in this area, from banks like Natwest to insurers like Phoenix and asset managers such as M&G. I reckon for the FTSE 100 to be on fire again, the financial services sector overall needs to do well.
However, the economy has been worsening and risks are mounting for many financial services companies. Higher interest rates could lead to more loan defaults, hurting profits. Consumers having less money to spend may lead to them cutting back on investment products.
So I will be keeping a close eye on when the outlook gets bright again for the financial services sector, as I think that could be a leading indicator for the FTSE 100 more generally.