Is the FTSE-100 bouncy…or bubbly to the point of bursting?
WITH the FTSE-100 reaching a 14-month high this week, and having gained 1,000 points since the nadir of the immediate aftermath of the EU referendum result, everything is going along swimmingly…as long as you aren’t paying attention to the news.
The Bank of England’s package of measures to stimulate the economy, announced last week, followed a barrage of data that pointed to an already-fragile economy being under great pressure.
Russ Mould, investment director at AJ Bell, has examined five indicators investors can use to judge whether there are further gains to be made.
He said: “For the moment the narrative that is dominating sentiment is that of further monetary stimulus – lower interest rates and more QE – from central banks and a swing in Governments’ fiscal policy from austerity to stimulus.
“This means that trying to take a strong view on how markets develop is trickier than ever. However, there are some key indicators that can be used to judge whether markets are rightly bouncy, or becoming dangerously bubbly to the point of bursting.”
1. British transportation stocks look to be on the right track
Transportation is seen as a leading indicator – if nothing is being shipped, then nothing is being sold – and it’s a case of so far, so good.
The FTSE All-Share Transportation index is marching higher and once more outpacing the broader FTSE All-Share.
2. Dr Copper is still looking poorly
The industrial metal is known as Dr Copper because of its supposed ability to forecast turning points in the economy. Its widespread use means that when it is in demand the economy is in good health.
But in January it hit a six-year low, and since then its improvements have done been sustained. It would need a continued increase, says Mr Mould, to help ease fears that the economy is sliding toward a deflationary downturn.
3. Small caps are making some progress
The smaller listed companies are a bellwether of investors’ appetite for risk. In good times they tend to outperform the market but when confidence is low and the market turns bearish, the small caps can fall even faster.
The UK’s FTSE Small Cap and America’s Russell 2000 have both rallied hard from their lows but have yet to reach where they began the year – and they may need to reach new higs for 2016 before their performance can be seen as a strong positive indicator.
4. Choppy waters have given way for a period of calm
While market volatility offers more opportunities for the brave investor, a series of modest gains are much better in creating an upward trend.
January and February were choppy – there were 27 open-to-close movements of at least 1% in January and February alone – and the EU referendum turned the atmosphere stormy, with five straight days of open-to-close movements of more than 2%.
A period of calm and less market volatility is “looking like a good thing”, said Mr Mould, and “further peaceful gains” would point to a bull run rather than a bubble.
5. The yield from UK stocks looks good against bonds
UK stocks still appear to offer a substantial premium yield relative to Government bonds – the FTSE All-Share is yielding 3.45%, compared to a 10-year Gilt yield of 0.68%.
“The All-Share has only twice offered a premium yield of 2% or more since 2008 and on both occasions the stock market promptly made healthy gains,” said Mr Mould, arguing that management teams are reluctant to cut the shareholder payouts as this tends to hit the company’s share price hard.
Mr Mould added: “None of these five signals look to be flashing danger, although Dr Copper is borderline amber, while the transport stocks, small caps, low market volatility and yield premium over bonds could all be interpreted as clear green lights.
“All five could prove useful indicators as markets digest the economic and market fall-out of the Bank of England’s new monetary policy package and any further monetary or fiscal stimulus introduced in the European Union, Japan or elsewhere during the second half of this year and beyond.”
