On 30 December 1999, the FTSE 100 (FTSEINDICES:^FTSE) index reached 6950.6. The day I am writing this article, 5th May 2014, the FTSE 100 stands at 6822.4. Over the course of some 15 years (practically a lifetime in investing terms), the stock market has never surpassed its 1999 high.
Now this gives critics of equity investing plenty of ammunition. “How can you recommend investing in something that hasn’t moved an inch in 15 years?” People who know more about shares know that what these statistics really tell us is how incredibly over-valued the FTSE 100 was at the end of the last century.
Stock markets tend to run in cycles
Stock markets tend to run in cycles of feast, followed by famine, followed by feast. The last feast ended with the tech boom of 1999. Since then we have had famine. First (Other OTC: FSTC – news) there was the tech crunch. Then there was the Credit Crunch. And then there was the eurozone crisis.
Each time the investing party has got going, the punch bowl has been taken away. Although this may seem like a terrible thing to say, it is actually the most optimistic thing I could say. Because this means that the current period of famine is ending, and we could be looking ahead to many years of an investing feast.
So much for the big picture. Now, what about the details?
A year of consolidation
Unfortunately, the one thing the big picture can’t tell you is the details. When will there be this transition between famine and feast? Will there be crash, stasis or continued stock market boom? No-one really knows.
My guess is that there won’t be a crisis of the magnitude of the Credit Crunch or the eurozone crisis. But what there could be is a clearing of all the froth.
We have already seen signs of this with the recent tech crash, where highly over-valued shares such as ASOS (Other OTC: ASOMF – news) and AO World have tumbled. There also been a pullback in emerging markets, with stock markets in countries such as Brazil and China falling. Regular shares in the UK stock market have also fallen.
Last year provided canny investors with astonishing returns. It is not often that many investors make 20%+ returns. Unfortunately, not every year is like 2013. Common sense tells you that it couldn’t be, otherwise the FTSE 100 would become over-valued in the matter of a few years.
So this year many shares have fallen in price. This seems to be a year of consolidation, giving the economy time to catch up with stock market expectations. So crash, stasis or boom? My current guess is stasis.
But let me add a rider: if you had invested in retailer Next (Dusseldorf: NXG.DU – news) on 30 December 1999 and held it till today, your investment will have increased 11-fold (and that is excluding dividends). Always remember that you are an investor in stocks, not the stock market.
Invest for the long term with this share portfolio
I suspect that, looking years ahead and ignoring the daily ups and downs of the stock market, shares are likely to forge ahead. So now may just be the time to invest in stable and growing blue chip companies.
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Prabhat owns none of the shares mentioned in this article.