The FTSE 100 index is in a strange place right now, in my opinion.
I keep hearing about the strength of the current bull market, and how shares are performing so well. However, while the FTSE 100 is hovering around its all-time highs, a closer inspection of the index reveals an interesting picture.
Many FTSE 100 stocks are down
Indeed, looking at the performance of the index’s constituents, around a third of the stocks in the FTSE 100 index are more than 15% below their 52-week highs. And around half of those stocks are 20% off their 52-week highs. That seems to be quite a high figure, in my view. I’ve included a table of these stocks below.
|Company||Ticker||Market cap||% off 52w high|
|Marks and Spencer||MKS||5,186||-19.8|
|WM Morrison Supermarkets||MRW||5,090||-15.1|
There’s some big names on that list. And many of them are popular dividend stocks.
For example, GlaxoSmithKline is 24% off its 52-week high. Barclays is 27% lower. Imperial Brands is down 20%. BT Group has fallen 38%. WPP is off 32%. Even Reckitt Benckiser is down 19%.
How is the FTSE 100 still so high?
How is the index near its all-time high with so many stocks underperforming?
It’s due to the construction of the index. You see, the FTSE 100 is a ‘market capitalisation’ weighted index. That means that larger companies have a higher weighting in the index. For example, HSBC Holdings, with its market cap of £148bn, makes up around 8% of the index. Royal Dutch Shell, with its A and B shares, make up around 9%. Then you have BP and British American Tobacco making up around 5% each. So just five stocks make up over a quarter of the index. It’s the performance of stocks such as HSBC and Shell that have pushed the index up.
Where to from here?
It’s tough to get a reading on the FTSE 100 right now, in my view. As we know, it’s at a high level. But as I’ve detailed, there are many underperforming stocks within the index. Many stocks appear to offer strong value right now, and are not priced at sky-high valuations. There’s also very little ‘exuberance’ that is usually associated with bubble territory. I’m yet to hear an Uber driver offer me a stock tip.
However, I view the US market slightly differently. Driven by an insatiable demand for the FAANG stocks (Facebook, Apple, Amazon.com, Netflix and Google), the S&P 500 index has surged around 20% over the last year. And many of those stocks are highly-priced. For example, Amazon.com trades on a trailing 12 month P/E ratio of 286. Netflix has a ratio of 192. Facebook has a P/E of 40. There also appears to be a very high degree of investor complacency at present. That does make me concerned that we could see a pullback in the US markets.
Would a pullback in the US affect the FTSE 100? Absolutely. Unfortunately, no matter how reasonably valued the FTSE 100 appears, if US markets fall, the FTSE 100 is likely to follow.
While no one knows whether global markets will continue to rise or fall in the short term, I think it’s a sensible idea to have some cash on the sidelines right now. Personally, I’ve been stockpiling cash for a while, and will look to deploy it when we see a bout of market volatility.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.