After fifteen long years it has at last happened. This week the FTSE 100 index finally set a new record high for the first time since the last day of 1999. Now some people have been acting as if this has some great significance. Me? I greet it with a shrug. The fact that some pundits are suggesting this means that the stockmarket in the UK is expensive, or conversely now that this "barrier" has been broken the market will soar from here is to my mind laughable. Why? Well simply put that is not quite how things work.
The issue to me is the use of the word "record" when it comes to evaluating the level of an index. To me a record is something that Roy Castle highlighted on TV and was either a natural wonder or an example of a great human or animal achievement.
When I was young the 100m world record of 9.95 seconds that was set in the altitude of Mexico in the 1968 Olympics seemed like it would never be broken. So when it eventually was 15 years later by Calvin Smith it was huge news. Even now every time a new record is set in this event it is reported widely. This is because it demonstrates that someone has run faster than any other human in history. No wonder we regard it as something special.
So "record" automatically suggests that whatever has been achieved will be difficult to break and therefore if an index has set a new "record" what are the chances of it staying there or moving higher. Well the fact that when it comes to an index like the FTSE100 where the companies within it and the percentage they make up of the index changes regularly is one reason why I feel that worrying about its level compared to previous levels is irrelevant.
Another is inflation. The Barclays Cost Of Living Index hits a "record" high each month and has done since it started in 1899. Moreover, unless we see deflation at some point in the future it will continue to do so ad infinitum. Now that never makes the headlines and of course why should it? But in reality it is no different from the FTSE 100 index in that it is simply used to measure a financial component.
Taking into account inflation, the level of the FTSE 100 index on the last day of 1999 would be the equivalent of 10496 in today's money so, in real terms, we are nowhere near the level it was then. Also, no fund manager I know uses the level of the index as a barometer of whether markets are cheap or expensive but the media does and no doubt some of you do as well. Only today I had a client ask whether now was a good time to invest given the index had reached a record high.
The truth of the matter is that whether an index is at an all-time high or not there will be companies within it whose share prices will be at their highest level and some where they are well off their high. As an example, today the three largest companies in the index; Royal Dutch Shell, HSBC and BP are all well off their 52 week highs by 25%, 17% and 22% respectively. No party poppers being pulled in the boardrooms of those companies!
At any time there is value to be had somewhere within a stockmarket. At times it is harder to find than others but it is there. That is why we believe that having talented managers looking for where that value lies and sticking with them even if they underperform for a short time is the key to building long term wealth. But timing the market on the basis of an index level is unlikely to give "record" returns!