Stocktake: FTSE rally no cause for patriotic fervour

British investors would have made more money if they had invested almost anywhere else


It seems the FTSE 100 has forgotten how to decline in 2017, hitting a record number of consecutive daily gains and all-time high after all-time high.

Brexiteers like to trumpet about the ongoing rally. They shouldn’t: continued gains for the resource-heavy FTSE are largely dependent on sterling weakness and on global commodity prices.

Sterling’s collapse has been a boon for the multinationals that make up the FTSE 100. The index gained 14 per cent in 2016; in dollar terms, however, it fell 4 per cent. Although British investors would have gained 16 per cent if they bought into the index after the Brexit result, sterling’s weakness means they would have gained 32 per cent had they bought US stocks, noted Wall Street Journal reporter Mike Bird last week.

Bird’s comparison may seem harsh; the European market rally is also diminished if one views it in dollar terms. Furthermore, Brexiteers point out that the domestic-focused FTSE 250 index has also soared since Brexit.

However, it’s facile to view the UK rally in isolation. Every major market index has soared since June. In dollar terms, the FTSE has been one of the poorest performers. Furthermore, the FTSE Local UK Index, comprised of companies that make most of their revenue domestically, remains below pre-Brexit levels.

Ordinary UK investors might not care too much; the FTSE rally has been good for them. Financial patriotism is misplaced, however – they’d have made more money if they’d invested almost anywhere else.

Short-term risks are rising

Sentiment and market technicals continue to suggest the odds of a near-term pullback are rising.

Sentiment has got frothy following two months of Trumponomics euphoria. Market commentator Mark Hulbert notes that the Hulbert Nasdaq Newsletter Sentiment Index – a measure tracking short-term Nasdaq-oriented market-timers – hit minus 27.8 per cent immediately after Trump’s election victory, meaning they were recommending clients allocate more than a quarter of their equity portfolios to shorting the market. Last week, the index stood at 77.8 per cent, with the big market gains causing a belated bullish stampede that will concern contrarians. Similarly, Investors’ Intelligence adviser polls indicate bulls outnumber bears by a ratio of more than 3:1.

Volatility, as measured by the Vix index, has fallen to extremely low levels lately. Furthermore, the S&P 500’s recent trading range has narrowed to levels rarely seen, with Fat Pitch blogger Urban Carmel noting such levels have typically been followed by substantial increases in volatility.

Additionally, the bounce that tends to follow US presidential elections often dissipates in February; since 1950, February has been the worst month in post-election years, according to LPL Research.

Finally, Donald Trump’s predictably bizarre behaviour last week is a reminder to markets that his presidency is, as CMC Markets notes, “unlikely to be a one-way bet”. Increased volatility may be on the horizon.

Early gains augur well for 2017

Stocks enjoyed a fine start to 2017 only to hiccup last week following loose talk from president-elect Donald Trump. Nevertheless, that bright beginning to the year should not be forgotten, suggests LPL strategist Ryan Detrick.

January has long had a reputation as a predictive month – as goes January, so goes the year, to quote an old Wall Street adage. Similarly, it’s often remarked that the first five trading days of the year tend to reflect the year as a whole.

The latter notion “might sound rather random”, admits Detrick, but history bears out this thesis. Stocks have averaged full-year gains of 14 per cent when stocks gained during the first five days, compared to just 1 per cent when those days were lower. More notably, when stocks gained more than 1 per cent during the first five days (like 2017), the full year finished higher on 23 out of 26 occasions.

A valuable market clue or a fluke? You decide.

Apple, the iPhone and tomorrow’s top stocks

Last week marked the 10th anniversary of the iPhone. Back in January 2007, Apple was worth “just” $79.5bn (€74.7bn); today, the company is worth $625bn (€587bn), the iPhone’s runaway success helping to catalyse an eightfold increase in Apple shares over the last decade.

A couple of other major tech names enjoyed even more success. Amazon shares have soared more than 2,000 per cent over the last 10 years, notes Bespoke Investment Group, while top spot goes to Netflix – worth about $1.6bn (€1.5bn) in 2007, the company is valued at $55bn (€51.7bn) today, an astonishing share price gain of 3,690 per cent.

What’s notable about Bespoke’s list of top performers is that most will be utterly unfamiliar to most investors. Indeed, of the 3,000 or so stocks in the index, a third of them didn’t even exist 10 years ago.

The point is, trying to unearth the Apple or Amazon or Netflix is like looking for a needle in a haystack; the next decade’s big winners may not even have been born yet.

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