If you are not a regular follower of stock market movements, you may have missed the fact that, before falling slightly on Friday, the FTSE 100 stock market index hit new all-time highs this week.
This comes on the heels of a relatively strong showing last year. Although London’s leading index is expected to rise by less than 1% in 2022, the American S&P 500 stock market index is expected to fall by 20%.
YOU MAY ALSO LIKE: Disney Company Will Cut 7,000 Jobs Due To Economic Woes
Many good judges believe that because UK assets appear to be relatively cheap, this strong performance will likely continue. This message, however, is at odds with the severe strain on many people’s living standards, as well as the ostensibly dire state of the British economy.
What the hell is going on? Should we be encouraged about our economic prospects because the stock market is performing well? The FTSE 100 does not represent the entire UK stock market. Its constituents are the 100 largest UK-listed companies in terms of stock market capitalisation.
So far this calendar year, the FTSE has gained more than 6pc, while the FTSE 250 index, which includes the next 250 largest firms by capitalisation, has gained more than 7pc. However, the latter is still down by about 14pc since the beginning of last year.
Furthermore, the FTSE’s very large firms are generally global in nature. They earn nearly 80pc of their income from abroad. The FTSE 250, on the other hand, is much more focused on the UK economy.
As a result, when the FTSE 100 performs well, it is more likely to reflect the market’s view of the global economy, which is frequently heavily influenced by news from the United States, rather than its view of UK economic prospects.
The strength of the FTSE 250 index, on the other hand, does reflect the market’s view of UK prospects – albeit one that is focused on corporate profits and influenced by movements in UK bond yields and interest rates.
These latter factors also have a significant impact on the performance of two other key asset classes, residential and commercial property, which have underperformed the FTSE 100.
Residential house prices in the United Kingdom are down 4% from their peak last year. Similarly, commercial property prices have fallen by more than 17%.
Indeed, there has recently been some cause for cautious optimism about both the global economy and the United Kingdom.
The global economy appears to be stronger than most investors expected just a few months ago, but US interest rates appear to be nearing their peak.
Although things remain dire for consumers and many businesses in the UK, more analysts are coming around to the view that the still-likely UK recession this year will be relatively shallow.
Markets are widely thought to be good at forecasting the future. Some people even believe they have semi-magical abilities. I believe this is a grave error.
Markets are generally good at assessing available data about the quantifiable near future. However, they are hopeless at evaluating the truly big questions, especially when they go beyond the narrow financial and economic scope.
Why should this come as a surprise? There are some things that no one, not even the most talented and foresighted stock market analysts and investors, can truly comprehend.
As a result, if the FTSE 100 index continues to rise sharply, it will tell us nothing about the likely outcome of the Ukrainian war or the difficult situation in Taiwan, to name just two known unknowns.
When confronted with such fundamental uncertainties, financial markets often turn a blind eye and hope for the best. Then, if something really bad happens, they can take a very bad fall.
Despite all pretences of rational calculation, when it comes to unknowables, the markets’ behaviour is dictated by the primal forces of fear, hope, greed, confidence, and caution.
And, right now, the geopolitical landscape provides ample opportunity for market surprises, as well as sharp shifts in market sentiment regarding the likelihood, severity, and impact of such developments.
