How Long Before FTSE 8,000?

Published in Investing on 10 December 2010

Run the numbers, and it's closer than you think.

How long before we see the FTSE 100 rise above 8,000?

You might think that the question is insane. After all, in March 2009 -- less than two years ago -- the FTSE sank below 3,500. Scary days, in short, with much talk of The Great Depression.

Even today, we're hardly out of the woods. Eurozone worries, public spending cuts as the government tries to bring the deficit under control, tax rises -- it's not difficult to find bad news.

Equally, it's not difficult to find good news, although that tends to get less exposure in the media. Right now, there are sparkling figures from the UK's manufacturing sector, strong economic growth in many overseas markets (and many FTSE 100 shares have decent overseas earnings, don't forget), and better-than-expected figures in terms of American consumer and corporate finances.

And don't forget, either, that before the FTSE's sickening plunge to 3,500, the index had reached 6,700 -- from where a mere 20% rise would have propelled it past the 8,000 mark.

So here are three different takes on how long it will be before we see 8,000.

1. Compound growth

The last decade hasn't been as good for stocks as most previous decades, that's for sure. The prestigious annual Barclays Equity/ Gilt study, for instance, has called it The Lost Decade.

The study has also dampened down expectations of long-term returns from the FTSE: 7% or so per year, versus the long-term trend of around 9%.

So let's take that 7%, and strip out the FTSE's current dividend yield of 3%, which gives us a 4% increase in capital values each year. And now let's apply that 4% growth rate to the FTSE's present level of 5,800.

The answer? In short, it's going to take around eight and half years to get there -- some time in mid-2019, in other words.

2. Rising earnings

That might be excessively gloomy, though. Let's consider all the data pointing to promising corporate earnings growth.

The FTSE 100 is currently trading on a forward P/E of around 12, which is hardly demanding. So let's assume no change in investor sentiment -- in other words, the P/E stays the same -- but factor in rising corporate profitability.

The answer? From where we are now, an annual increase in earnings of just over 8%, if sustained for four years, would see the FTSE hit 8,000, assuming a constant P/E of 12. Or, if sustained over three years, an 11% annual increase in earnings would deliver the same level of 8,000.

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Neither earnings increase figure looks ridiculous to me, bearing in mind where we are in the economic cycle. Better still, a lot of heavy hitters in terms of the FTSE's corporate earnings make-up are poised for a recovery -- beaten-down BP (LSE: BP), for instance, as well as the banks, house builders, insurers and so on.

So we're talking a FTSE of 8,000 that may be just three and a half years away -- mid-2014, in other words. That's rather better than mid-2019, for sure.

3. Rising P/E

Now let's factor in a change in sentiment as well. Corporate earnings grow at 9%, say, over the next two years, while the market's mood places the FTSE 100 on a P/E of 14 -- again, hardly demanding, and well below (say) the FTSE 250's present P/E of 18.

That gives us a level of 8,000 that is just two years away, at the end of 2012.

And again, I'd stress, the assumptions aren't demanding or ludicrous: a 9% rise in corporate earnings over two years, and a P/E of 14.

Even better, one year's earnings growth of 9% and a slightly higher P/E of 15 would see us hit 8,000 at the end of 2011.

Doodles

These calculations, I'd stress, are 'mind games' -- back of the envelope scribbles with a pencil and calculator.

Nevertheless, the story that they tell is revealing. When people hear the Fool's David Kuo talk of FTSE 8,000, it's tempting to dismiss such talk as mere speculation. Yet the underlying numbers show how very possible it is.

But will it happen? We'll have to wait and see.

More on the markets:

> Malcolm owns shares in BP.

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Comments

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Luniversal 10 Dec 2010 , 8:21pm

A Footsie at 8,000 at the end of 2012 would be worth less in real terms (RPI) than at its peak thirteen years earlier.

We are into our second Lost Decade. Yet equities are sold as the sturdy platform on which retirement savings should be built.

Since we were all worrying about Y2K and wincing over the Millennium Dome party, the intermediaries, nanosecond traders and promoters of products have not wasted away. Only their customers.

Fingered 11 Dec 2010 , 12:30am

I must get the limmo respayed before VAT goes up......

Fingered 11 Dec 2010 , 12:58am

.......so before I attend to adding to the old portfolio old chap, I really really had better hurry up and get one's skates on before the cost of paint and travel security goes into bubble territory eh what? I'll get my secretary to take care of calling the garage chappy first thing Monday and the stock broker chappy in the afternoon.

Fingered 11 Dec 2010 , 1:04am

FTSE doubling 11,600 anyone?

Terrapin1 11 Dec 2010 , 9:31am

I have to agree- currently the FT has ftse100 on a p/e of 11 which beggars belief in these troubled times-but the stockmarket is not the UK or any real economy, and banksters are running amok with free money buying up stocks and commodities until someone stops Bernanke.
A Chinese meltdown would flatten markets for years-and that is a total unknown with human rights abuses and profligate fossil fuel burning

sitecode 11 Dec 2010 , 4:44pm

These sort of thought exercises are a waste of time. Yes the economy will recover. Yes earnings will increase. Concentrating on the fundamentals is the wrong way to look at it, however. The stock market will hit 8000 or 10,000 or whatever when it becomes fashionable to invest in it again. What was the P/E when it hit its peak - 25, 30? Over the last 10 years the big money has gone anywhere but equities - especially into bonds. So you are telling me a 10 year UK gilt earning 3% is a good bet? You must be joking.

A market in shares or bonds is rarely valued according to the fundamentals (lets say in the last 10-15 years especially). Its either "in" or its "out".

Fingered 12 Dec 2010 , 4:54am

@Malcolm .....These calculations, I'd stress, are 'mind games' -- back of the envelope scribbles with a pencil and calculator.

Nevertheless, the story that they tell is revealing. When people hear the Fool's David Kuo talk of FTSE 8,000, it's tempting to dismiss such talk as mere speculation rather than the mere ravings of a nutter, like Cramer. .... Yet the underlying numbers show how very possible things are for example here's THE puzzle for you to try and work out : 2 x "s" = 2023 and 2 x "i" = 2045 .. :-)))) .

But will it happen? We'll have to wait and see...................On the subject of "happenings" ....what happened to that other perma bull matey of yours Brucie Jackson? Has he left? Oh he was a lot of fun!!

curedum 12 Dec 2010 , 6:37am

The market has been partly restrained by big players like insurance companies and pension funds turning from equities to bonds. But now major countries are adopting policies like QE which stimulate inflation, partly to monetize their huge debts. Inflation is bad for bonds, so money will be moved into assets which do better in an inflationary environment. Equities do well with modest inflation, so this should help the FTSE.

How much profit would you make if the FTSE hits 8000 but inflation has reduced the value of your pound by a third?

Luniversal 12 Dec 2010 , 7:02am

A lot of bullishness rests on the 'nowhere else to go' argument: cash returns zip, bonds overcooked, property in the doldrums, gold's had its run, ergo it's equities!

Trouble is: not only can the market stay irrational longer than you can stay solvent, the fabled 'weight of institutional money' can refuse to become an avalanche in shares' direction longer than you would believe possible.

You do not have to be a permabear to recognise that the old post-WW2 rules of the game-- Western (esp. American) dominance, free trade, fiat money and a little bit of inflation to keep activity simmering, short-run and predictable cycles-- may be altering in a far more drastic manner than the nostalgists for the Nineties can see.

You can shift your funds into the BRICs, but why assume that the new economic superpowers east of Suez will organise themselves according to the casino rules of the Anglo-American hegemony of 1800-2000? Stockmarket booms, paper currency and the exaltation of bankers into little tin gods, on whose altar the taxpayer must make burnt offerings, are not necessarily the way Chinese and Indians are going to run their affairs.

NeilW 12 Dec 2010 , 8:02pm

"But now major countries are adopting policies like QE which stimulate inflation, partly to monetize their huge debts"

Except that QE doesn't do that - it's just a financial asset swap - and the 'national debt' isn't a debt at all in the UK, US or Japan - its more akin to a bunch of savings certificates.

If you're betting on inflation, I and plenty of others will be happy to take your money. It ain't going to happen.


supasap 13 Dec 2010 , 10:29am

hi Fingered when does the elevator ping for gold descent..... I am up a bit now ....... when to sell ..... it's so hard

Fingered 13 Dec 2010 , 11:10am

Hi Supasap, have you noticed the gyrations lately? That's instability matey.........Question: Remind me again ...how are you invested? Gold ETF? Mining stocks or physical metal?

Fingered 13 Dec 2010 , 11:43am

Supasap...will send you an email.

supersol42 13 Dec 2010 , 2:42pm

Curiously, people were talking very much like this in the summer of 1931...

ProfessorMarcus 13 Dec 2010 , 2:47pm

... and 2007!

Questing09 13 Dec 2010 , 2:51pm

Oddly enough, I was wondering exactly the same thing - What's happened to Bruce Jackson? He seemed to dominate TMF at one time. I recall he was consistently advising us to be brave and buy shares when the market was at its bottom - pretty good advice really, I hope he took it himself and is now happily enjoying life in the Caribbean or wherever.

Fingered 13 Dec 2010 , 3:04pm

The F17 looking interesting.......

Nemo666 13 Dec 2010 , 4:26pm

I am about to slaughter a chicken to the gods to see when the FTSE will reach 8000 so I'll be right back....... 3.23 pm Tuesday 15 December 2031 lol

I reckon either equities will still bethe way to invest when i retire or comradeS the evil capitalist scum will be dead and we will all live in a star trek style utopia where money isn't used (well apart from all those alien wars).

Comrade Nemo

Fingered 13 Dec 2010 , 5:17pm

.......forget chickens, tin gods want nations.

gmg1950 13 Dec 2010 , 5:20pm

Don't listen to Nemo666, the 15th December 2031 is a Monday.

Tara1492 13 Dec 2010 , 5:51pm



The economic situation does have terrible 1930's Germany type undertones. Did the German stockmarket go up then? Did it keep up with the raging inflation?

F958B 13 Dec 2010 , 6:14pm

Until wages start to increase, inflation in one part of the economy will be offset by deflation somewhere else; there is only so much money to go around.
Excessive and prolonged QE could cause inflation in the long term, but I'll be watching for big increases in wages as the signal that high inflation is coming.

Having said all that, I have no interest (excuse the pun!) in government bonds because one day they will default, devalue or inflate away.

....and in these times of financial instability, government debt problems and fears over nations ability to pay debts, I see gold being a beneficiary.
Yes, the gold price is hot. Yes, it has come a long way. Yes, it could correct sharply at any time.
But I expect to see gold considerably outperform any other major asset class for the next 3-5 years.


Fingered 13 Dec 2010 , 6:16pm

The hyperinflation period for Germany was 1923. eg: Price Index: '14@1.0, '19@2.6, '20@12.6, '21@14.4,Jan22@36.7,July,'22@100.6,,Jan23@2785,Jul23@194000,Nov23 @726000000000

curedum 13 Dec 2010 , 7:27pm

@NeilW

Despite persisting record low BoE interest rates, impending tax rises and cuts in public spending, the latest RPI figure is still 4.5% due to "imported" inflation. We keep being told that this (and CPI of 3.2%) are just temporary blips and that deflation is the real threat.

Creating money "out of thin air" - whether physically printing it or electronically (virtual money) - is eventually going to produce higher inflation, just as the Emperors of Ancient Rome discovered. The clever chaps at the central banks think they can avoid that by reversing QE at the right time. We'll have to see if they manage to succeed - I rather doubt it.

gilgongo 13 Dec 2010 , 9:30pm

I'm not an economist, but isn't the damage done by inflation largely determined by whether it's expected or not? With all the hand-wringing about it right now, it's hardly going to be a Spanish Inquisition (obligatory Python joke). And I'd rather the BoE had us fight with with 7% inflation and a 10% interest rate than an RPI of 4.5% and interest rates of 1%, for obvious mathematical reasons. And if my salary was keeping up with it at the same time, so much the better. It's only money.

I was alive when we briefly had inflation of 14% in the UK (but I was too young to remember it). My Dad said that most of the problem in reality was re-writing costs and updating book-keeping to keep up. But today even the smallest business has a spreadsheet, a printer and a roll of sticky labels. So, I say bring on QE, and if the BoE gets it wrong, we'll forgive them. Who knows - with rampant inflation decimating the value of the pound, we might re-discover our long-lost manufacturing sector! Come back Tyneside, fire 'em Sheffield - we'd be back on the scene, 1950's style!







browntrout74 13 Dec 2010 , 10:05pm

Certainly looks to me markets are crashing upwards in the near term, buy long stay happy :)

curedum 14 Dec 2010 , 6:36am

@gilgongo

Inflation damages the wealth of people on fixed incomes, e.g. pensioners with level annuities.

Fingered 14 Dec 2010 , 11:57am

@gilgongo.......... bring on the QE? Forgive the BoE ? - Sorry not for me pal! @browntrout74 ...yep this oh so tedious crashing upwards is grinding on near term with backing and filling..... but that's ok....three cheers for the out-of-touch-with-reality Wall St eh?

SmilusCynicus 14 Dec 2010 , 1:57pm

Historically, the Dow/FTSE ratio was 1.65:1 but in recent years has become 1.95:1, which suggests that the Dow would be approaching 16000 if the FTSE was to reach 8000. And what is the timeframe for that. Remember, the sheep follow the shepherd.

Fingered 14 Dec 2010 , 2:26pm

...yep SmilusCynicus.......and let's not forget the DOW priced in real ounces of money not that funny paper Central Banker monopoly stuff is massively along with Kuo and Jackson. ?

Fingered 14 Dec 2010 , 2:30pm

ooops << is massively overpriced, so Malcolm it then seems you are a sheep in the same Flock along with >>

spinquark 15 Dec 2010 , 12:32am

curedum,

Quite a lot of profit if you have a substantial debt.

(oh but how did we get into this mess - um er um - rampant debt - around we go again on another cycle)

langers2 15 Dec 2010 , 1:21am

From The Motley Fool UK Investment Guide (page 29):

"DO NOT LISTEN TO ANYONE ON TV, ON RADIO OR IN THE PAPERS WHO PRESUMES TO BE ABLE TO FORETELL THE SHORT-TERM MARKET DIRECTION. THIS PERSON IS MOST LIKELY AN IDIOT."

Guess it's different if they're on the internet :-)

logicscience 18 Dec 2010 , 10:17am

Interesting HSBC proposition: 3.75 year fixed term deposit - 16.5% return if the FTSE rises or stays the same, deposit returned if it falls.

HSBC must have positive expectation of a decent rise before the end of 2014. No?

browntrout74 22 Dec 2010 , 11:03pm

and if the FTSE rises 33% you get what?

logicscience 24 Dec 2010 , 9:40pm

I am sure I didn't imagine it but its not on offer anymore however, 16.5% was the return for any rise in the market over the term.

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