What I'll Do When The FTSE Hits 6,000

Published in Investing on 4 February 2012

The magic number isn't far away. What to do?

If the FTSE rises by just 2% from where it is as I write these words, it will pass the 6,000 mark -- a level that it breached briefly in early July, before plunging down to 5,000.

And when it does pass 6,000, I've no doubt that we'll see the usual comments churned out. You know the sort of thing... 

- It's a bubble... Sell!

- It'll never last... Sell!

- Valuations are looking 'demanding'... Sell!

And so on. In short, while 5,999 will attract almost no comment, a number beginning with a six suddenly turns everyone into an instant stock market pundit.

Boom and bust

Now, to be sure, the market doesn't have a particular good track record when the FTSE begins with a six.

The market briefly passed 6,000 before plunging down to 5,000 in the wake of the collapse of Long Term Capital Management, following the Asian financial crisis in 1997.

It recovered, passed 6,000 again, climbed to 6,951 on 31 December 1999 at the height of the dotcom boom, and then crashed -- bottoming at 3,287 in March 2003.

And, prior to the credit crunch and ensuing recession, it passed 6,000 again, peaked at 6,732 on 15 June 2007, before slumping to an intraday low of 3,461 on 9 March 2009.

So you could say the FTSE's got form. Sell!

Irrational exuberance

But I certainly won't be doing anything of the sort. For whatever the chartists and day traders say, the fundamentals of today's market are different.

Have we got a combination of heady GDP growth and high interest rates? No. Cheap credit and 'irrational exuberance'? Again, no. Are valuations at stratospheric levels -- the FTSE's P/E of 30 or so in March 2000? If only.

The real economy is still very much on its knees; the last quarter's GDP growth was negative -- and some people are predicting another ten years of working our way out of debt.

More to the point, perhaps, the market is trading on a P/E of just over 10 -- a third of 2000's lofty peak.

Profit-driven

Now, to be sure, 'quantitative easing' and the European Central Bank's injection of €489 billion of additional liquidity into the banking system is doubtless helping share prices. As is a sudden flurry of post-Christmas good news, especially with respect to the American economy.

But I think there's a more fundamental factor at work. Rising profits, in short. And rising dividends, as those profits are distributed to shareholders.

We've seen it this past week in the form of announcements from AstraZeneca (LSE: AZN) and BT (LSE: BT-A), for instance. Revenues might be down -- but profits are up, thanks to factors such as deleveraging, cost-cutting and lower input prices.

More cheer

And in the coming week, with results from BP (LSE: BP), GlaxoSmithKline (LSE: GSK) and Reckitt Benckiser (LSE: RB) due, I'll be looking hard to see if there's more of the same. The economy might not yet be doing much for the top line -- but good old-fashioned hard-nosed management is certainly delivering growth to the bottom line.

In fact, as I wrote in early January, the latest set of corporate profitability figures -- for the third quarter of 2011 -- show corporate profitability at its highest since the third quarter of 2008.

There have now been eight successive quarterly increases since the third quarter of 2009, which represented a 16-year low. And the signs, on the whole, seem good that the trend will continue.

Rational response

In short, when we do pass the magic 6,000 mark, I won't be selling. I'll be doing what I'm doing now: looking for bargains, and buying into them when I spot them.

> Here's your free Essential Investor Kit. Over the next week, you'll get share ideas, a sector report and much more. Don't miss out!

> Malcolm owns shares in AstraZeneca, BT, BP, GlaxoSmithKline and Reckitt Benckiser. The Motley Fool owns shares in AstraZeneca, GlaxoSmithKline and Reckitt Benckiser.

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Comments

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ANuvver 04 Feb 2012 , 4:41pm

As someone who's in with both boots, I'm rather enjoying all the green on the screen. Don't really trust it though.

I'll be very interested to see what happens to the "return of, rather than return on" paradigm over the next couple of years.

Being predominantly a long-term income player, I'm as philosophical about gains as losses. The capital gains are a cushion - at the moment I've got it to lose. Meanwhile my Heath Robinson PermaIncome Machine keeps on bubbling, gurgling and spitting out the goods.

Long as I can beat the living daylights out of the best savings account on offer the FSTE can do a triple toe-loop and a salchow for all I care.

Tough times for bargain hunting though. A few of my PostIts have fallen off the wall...

MDW1954 04 Feb 2012 , 9:37pm

Tough times for bargain hunting though. A few of my PostIts have fallen off the wall...

@ANuvver

Ha! I know that feeling!

Malcolm (author)

equitybore 05 Feb 2012 , 9:51am

The cosy feeling of a bit more money in the account just means for me a better bottle of wine...

MunroMan 05 Feb 2012 , 3:15pm

Capita has told us, and our data confirms it, that dividends are rising. On past form that could be worth another 25%.

liesarenocomfort 05 Feb 2012 , 8:16pm

If you to plan to eat hamburgers throughout your life, and are not a cattle producer, should you wish for higher or lower prices for beef?

atalbot9 06 Feb 2012 , 9:39am

"If you to plan to eat hamburgers throughout your life, and are not a cattle producer, should you wish for higher or lower prices for beef?"

If my hamburgers paid a rising dividend I'd be happy for lower beef prices, on the other hand I'd want rising beef prices otherwise I'd be questioning why I was buying hamburgers in the first place.

ANuvver 06 Feb 2012 , 11:47am

Malcolm:

Glad someone else does that too. Makes me feel a bit less old-farty.
Oddly enough, the cat has to be kept off the laptop (she recently tried to buy shares in "546rt7y8uijk[#"), but shows no interest in my gallery of PostIts.

Of course, "546rt7y8uijk[#" could be the next big thing and I'll kick myself...

themotleyidiot 06 Feb 2012 , 1:26pm

Increasing Divis are being generated through cost reduction as much as growth and profit. Astra Zeneca being a case in point. 7,500 redundancies !!
BP is a special case; they have the where-withall to pay out and were always a good and constant dividend payer - temporarily restricted as we know. However, one would really be a motley idiot if one did not take profits at 6,000 in order to have the cash to buy in when the market does crash, which it will, and one has the opportunity to seriously increase dividen income. The longer term view being that when we see rampant inflation as a consequence of QE the income will be a bonus.

BrnzDrgn 06 Feb 2012 , 1:49pm

Doesn't matter to me at the moment as my losses are locked in.

ALANW2 06 Feb 2012 , 3:12pm
cdlnet 06 Feb 2012 , 3:38pm

"However, one would really be a motley idiot if one did not take profits at 6,000 in order to have the cash to buy in when the market does crash, which it will". Of course, but the market has to rise before it can crash. Right now, optimists are the true contrarians.

globally 06 Feb 2012 , 10:02pm

Predicting what markets are going to do is a mugs game. It's the unforeseen events that so often have the greatest impact on share prices as we have all seen to our cost, at least to some extent, during the last three or four years. Did you predict that bank shares would collapse so spectacularly or foresee the uprisings in North Africa or the financial meltdown in Greece? Well I didn't but I did buy a few shares cheaply in some decent companies and that has helped me to recover part of the losses on bank shares. But it was more luck than anything else because the so-called "experts" were so convinced then that the end of civilisation as we know it was nigh that I thought they just don't know what they're talking about and I bought. It's all very well saying profits are rising and the FTSE100 trades on a p/e of 13, but what happens to the market if the euro zone disintegrates and a domino effect brings down many international banks in it's wake or Iran goes nuclear and the west, in one guise or another, decides to intervene? I agree that's a highly unlike scenario but, nevertheless, we live in very uncertain times and that,s one of the reasons why shares apparently now look so cheap. The other is that nobody really knows what the next few years hold in store for us either politically or economically.The scene is changing all the time but 6,000 on the FTSE index looks quite likely to me.. However, if you're thinking of selling then, you might find a lot of others who have the same idea!. Who knows?

alarmbells 07 Feb 2012 , 9:48am

but good old-fashioned hard-nosed management is certainly delivering growth to the bottom line.

Quite so. But therein lies the problem.

You can only squeeze so much out of static sales. And most of that's been done leaving profits at a cyclical high. Any negative demand shocks will have horrid consequences.

And in the Western part of the universe I fail to see any positive demand shocks (USA?).

Fred. Please come back and do some more shredding.

jonasdad 07 Feb 2012 , 1:00pm

Couldn't agree more, alarmbells. Profits have increased due to ferocious cost cutting but there's a limit to this and my fear is that most companies have reached that limit.
Where's the growth coming from over the next few years? Certainly not consumer spending, or government spending in the West.
Many companies are increasing share buy backs, and dividends because they can't see how they can invest the cash more profitably in the business and that's another worry.
But as long as my dividends keep coming in I'll stay invested in high yielding blue chips, and hope the market doesn't crash before my income drawdown is re-assessed in May!

ukvalueinvestor 16 Feb 2012 , 1:34pm

6,000 is an interesting number because it's the last big round number before we reach a new record high of 7,000. It would be a bit weird if we hit 7,000 in the middle of this mega-crisis!

Still, the only thing that matters is the price/value ratio in the long run. Every time we bounce off of 6,000 and spend another 6 months in the doldrums it gives the economy that bit more time to keep growing.

In 1998 6,000 was ridiculous, but 14 years later I think it's very reasonable if not quite cheap.

Gazing into my crystal ball (which is a little dusty as I never use it) I think that we'll probably stay below 7,000 until the next real bull market starts in a few years. Then we could easily blast straight past it an on to 10,000 with no problem at all.

Of course by then many sane investors will probably be upping their cash allocations. That's my 2 pence anyway.

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