All of the mainstream media reported on Monday 24th February 2014, that the FTSE 100 has reached a 14 year high. But is that really true: is the FTSE 100 at a new high?
“FTSE 100 hits 14-year closing high after flurry of takeover action” – guardian
“FTSE 100 set to hit new record as investors await £14bn boost from Vodafone deal” – thisismoney
“FTSE 100 climbs to 14-year high” – The Telegraph
“Strong Vodafone puts FTSE in grasp of all-time high” – Reuters
Not one of these articles mentions inflation or the fact that these are “nominal” highs. As ever, reporting half of the facts makes it much easier to grab the interest of the British public. However, don’t fear geeks, I’m here to bore you with the truth!!
The FTSE 100 hits 14-year NOMINAL high
Nominal is a very important word that all of these headlines are ignoring.
First of all, let’s examine the claim that the market is at a new high:
So, the market closed on Monday 24th February at 6865.86. Indeed, this is its highest closing value since December 30, 1999, when it closed at 6930.20.
However, the important thing to remeber that this is the NOMINAL high, and therefore it doesn’t include inflation. One share of the “FTSE 100” would have cost £68.66 in Feb 2014, and £69.30 in Dec 1999. However, £69 in 2014 is certainly not worth the same as it was in 1999 due to inflation.
Inflation adjusted FTSE 100 graph
If we take today (Feb 2014) and work backwards with inflation, we obtain the following inflation adjusted FTSE 100 graph:
Monday’s price of 6865.30 was a 14-year NOMINAL high. However, it was only a 5-year inflation adjusted (or REAL) high. It’s called “Real” for a reason Mr. Media, because it’s real…
So, it the FTSE 100 at a niw high. No. it’s not. The truth would be that:
“The FTSE 100 is currently 26% below the REAL high from 1999.”
Not really as sexy for a headline, is it?
Do I care if the FTSE 100 has hit a nominal high?
No, I really don’t. As you can see from the graph, the nominal price of the market (red line) goes upwards! Imagine that I invested £10,000 at “new highs” between April 1984 and today.
Since April 1984, the market has reached new highs in 66 months.
For example purposes, I will choose 5 of these dates haphazardly to show how much you would have today if you invested £10,000 at each of these nominal highs:
As you can see, in the long-term, the market moves from bottom left to top right. In all my examples, other than 1999, the annual returns you receive after investing at the “new high” are over 5.5%. Therefore, they outperform inflation in the long-term and they outperform cash returns.
Even if you bought 100% of your investment on 30th December 1999 (which you wouldn’t have done because you are a fan of diversification and sensible investing), your returns would still have been better than the current savings rates across Britain’s banks.
Yes, ideally, you want to buy low and sell high. However, if you have £10,000 to invest at a new high, you would still be making an “investment” which outperforms holding cash.
See my post on timing the market for further analysis of this.
But, couldn’t I wait until a big fall in the market? Well, as you can see from the graph, that might not come for many years and you would be losing out on dividends over this period.
Again, I’ve written about “the best time to invest in the market”. I suggest you check it out if you are wondering about this.
The longer-term trend in nominal prices
Before I go, I thought I’d share one other pretty inflation adjusted FTSE 100 graph:
This graph shows the inflation adjusted FTSE 100 (as before), with three trend lines added:
- Red – a polynomial trend line showing that the making is slightly under trend
- Green – a linear trend line tracking the full data showing that the market is under trend
- Blue – a linear trend line based on 1984-1996 extrapolated. This trend line is used to show that if the 1999 craziness had never happened, where would we be today? The answer is that the market is a long way below what many people consider to be the “norms” set during this period.
Yes, mainstream media, the market is high. However, it is only NOMINALLY high. We would never say that milk is “over-priced” because it almost the same price that it was nominally in 1999. We certainly wouldn’t say that it is overpriced if it had fell compared to inflation over that period.
I understand that milk prices don’t bring in the readers. The stock markets and housing markets do. However, in order to not mislead people, we should view the stock market (and indeed the housing market) in the same light. Rant over with sensationalist headlines (until next week when I shall “destroy mainstream media headlines with record levels of fury”)…
I love the title of this post. Long term perspective in investing is so important. Personally, I like when markets are low and undervalued. That way I can invest with confidence that I’ll have outsized future returns.
Thanks for the post and to point out again how mainstream media is often wrong and, what is more important, is misleading.
In principle investor should buy low and sell high and, as you previously said, never follow the herd.