Yes yes, we know about the old forecast that FTSE will go up and down, but not necessarily in that order!
Only this time, we think it will be like that.
Here’s why. A) Fundamentals
Long-term stockmarket moves are driven by fundamentals. Thus in the long-run, share prices are a function of corporate earnings and interest rates. Corporate earnings are what inspires share purchases, and so over time, the higher the earnings, the higher share prices will be. Interest rates have three effects. As an alternative to share purchases, bonds provide a benchmark against which dividends can be measured. There is a second, more subtle outcome from interest rate changes. Bond yields are used as the discount rate applied to future company earnings to give them a value today. Hence higher rates mean that future earnings appear less tempting today. It is also thought that companies are generally borrowers, and so higher rates will reduce profits. So by all three measures, higher interest rates lead to lower share prices.
Here’s why. B) Market Noise
We are all familiar with what the fabulous Benjamin Graham called Mr Market. (If you are not familiar, minimise this article and google it straightaway, right now, without delay). Mr Market reacts to chitter-chatter, market data and political developments, becoming overly optimistic, or excessively pessimistic. Many of these inputs are essentially unpredictable – but not all of them!
Here’s why. C) Momentum
There is also the matter of market momentum. Once it starts moving in a positive or negative direction, the market gets the wind in its sails and tends to keep going. Hence the famed capacity for the market to overshoot.
Our chosen time frame for market prediction is 6 months. This was designed to be like a bridesmaid’s dress – long enough to cover the essentials but short enough to keep you interested. We feel that 6 months is long enough for Fundamentals to have an effect, for predictable Market Noise to be included and for Momentum to have not reversed.
On to the Predictions for 6 months time, Friday 13 December 2019!
We do actually see the markets going up, then down, as per our intro! The going up is down (see what I did there) to slightly softer fundamentals (world economic slowdown), initially being outdone by the excitement of a new PM with new policies over Brexit and other minor matters. However, we then see moves down, down to Brexit reality (and maybe No Deal).
Last time, in May, we advised “Go away at the end of July, come back in mid-November”, forecasting a rise into July and then a fall back to 7200 by 15 November. The events of the last 4 weeks have done nothing to change that view. Today, FTSE is at 7351. By mid December, we see it stuck at 7200, having been up to 7500 in July, but brought down by soft fundamentals and Brexit uncertainty.