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Is the FTSE bubble about to burst?

Market optimism has seen the FTSE reach a new record high this month, with the UK index passing through the previous record set on 30 December 1999, closing at a new peak of 6,949.6.

The previous record close was 6,930.2, set at the height of the dotcom boom. The new record makes sense in light of the expansion of the UK economy, while low inflation has pushed back expectations of an interest rate rise further, and improvements in the Eurozone.

The UK blue-chip index came just 29 points shy of the 7,000 mark early this month, only to fall back again. Every time it comes close to reaching this high, it sheds points and disappoints investors. What could be potentially holding the index back? It could be a bit of market fear, since the last two occasions where such a level has been reached have preceded two of the most devastating bear markets in living memory.

The first, of course, was the bursting of the dot.com bubble, which wiped off around half the value of the index over three and a quarter years. The second was the credit crunch, where the value of the FTSE 100 again plunged by 48%—this time the fall was much faster with it reaching a low of 3530 within just seventeen months.

However, this is definitely a much healthier time, with the stock market propelled through its previous high by the global economic recovery. Companies are in better shape and earnings are much higher than they were in 1999 for example.

There are many catalysts that could push the FTSE 100 through the 7,000 mark. Stock markets could get a further boost from the European Central Bank quantitative easing programme –. There is the May General Election, which while uncertainty can cause jitters, the conclusion can bring about a boost.

Potential setbacks could however arise from further weakness in Chinas growth, the oil price, Russia, Greece or any other known or as yet unknown factors which could inhibit the index breaking through the 7,000 mark.

So, how important is it that the market passes through its high? At Lowes Financial Management we never try to time the stock markets, hoping for a quick win. That tactic has been proven time and again to be a fool’s game. Instead we like to take advantage of the expertise of managers that produce returns on a regular basis, in particular those that, through our dedicated research, we can see have a longer term outlook, investing in the companies that have growth potential down the line.

Also, we like spreading the risk within portfolios by using investments like auto-call structured products, which can deliver useful returns for portfolios in flat and slightly rising markets and in some cases, even falling markets. They offer a defined return on money invested as long as the stock market is above pre-determined points at a set anniversary than it was at the start of the investment period. Investments such as these, potentially giving high single and sometimes double digit returns, can make a useful contribution to portfolios and help smooth the investment journey when stock market performance is volatile.

Whilst we aim for consistent returns over the long term whether the stock market goes up, down or sideways and we have been around long enough to admit that we know that we don’t know which way it will head next, we do believe that when the FTSE 100 does eventually break through the sentimental 7,000 level it could continue to rise significantly from there and we don’t intend to miss out.

This was posted in Bdaily's Members' News section by Lowes Financial Management .