FTSE 100: Bear Market Or Blip?

My take on the FTSE 100 (INDEXFTSE:UKX) and the “bear market or blip” question.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The first quarter of the year has been a roller coaster ride for investors, with many indices across the developed world slipping into what is technically known as bear market territory, before going on to stage a strong rebound throughout February and March.

The FTSE 100 is now close to its break-even for the year to date, despite falling by 11.4% during the five weeks to the 11th February. Behind all of this price action has been a single common theme —commodity prices and commodity producers.

Initially, tumbling commodity prices drove a significant deterioration of earnings across the commodity space, prompting a wave of dividend cuts, disposals and restructurings. More recently, oil and industrial metals prices have embarked upon a sharp and sustained recovery and consequently, investors have piled back into the sector.

Bear market or blip?

After seeing such wild swings in equity prices and with the FTSE 100 now so close to its break-even level for the year, many investors could be forgiven for asking if this is really the beginning of a bear market or if it is just a blip. The truth is that we probably won’t know for at least another three to six months.

The oversupply that has driven the sell-off is yet to show signs of dissipating and although the number of active oil rigs in the US has fallen by almost 50% since May 2015, suggesting that some producers have come off line, global oil output remains at record levels and North American commercial crude inventories are still close to an 80 year high.

The fact that oil and other materials prices are rising, even as this oversupply persists, suggests that investors could now be betting on production shortages over the medium to longer term, given the extent to which capex has been cut across the commodity space in recent quarters.

Implications

Nevertheless, it will be difficult for anybody to predict where commodity prices will be in six months time without knowing first, how sovereign and commercial producers are likely to react to the current recovery.

If, in six months time, the rig count has begun to creep back up in the US and/or capex is rising once again at the global level, then it is likely that the current rebound will fade into memory as a mere blip at the beginning of a bear market for the FTSE indices.

If, on the other hand, US shale stands pat and industry wide capex barely moves then it is quite conceivable that commodity shares could cling onto much of their recent gains. This would be great news for the FTSE 100 and FTSE 250 indices in 2016 and, given the heavy weighting toward raw materials in each, it could also mean that a bear market is avoided.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Skinner has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

With a P/E ratio of 9, is the Aviva share price a bargain?

Christopher Ruane looks at the Aviva share price and considers some strengths and weaknesses of the FTSE 100 insurance business.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
US Stock

Is it too late to buy growth stock Shopify after its 25% pop?

Up more than 40% this year, Shopify is on fire at the moment. Here, Edward Sheldon explains how he’d play…

Read more »

Investing Articles

Investors should consider buying this energy AIM stock, up 50% in the past year

AIM stock Afentra has seen a stellar price rise in 12 months to November. I believe there may be room…

Read more »

Investing Articles

2 ISA shares to consider for a large passive income!

Looking for dividend shares to buy in a Stocks and Shares ISA or Lifetime ISA? Royston Wild reveals two of…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

A Bitcoin investment that can be held inside a Stocks and Shares ISA or SIPP

UK investors can’t buy Bitcoin ETFs for their investment accounts or SIPPs due to FCA regulation. This stock could be…

Read more »

Entrepreneur on the phone.
Investing Articles

As the Vodafone share price slides 6% on lacklustre H1 results, what does the future hold?

After posting moderate results this morning, Vodafone saw its share price sink further, erasing this year's gains. Our writer looks…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing For Beginners

If I’d invested £5k in a FTSE tracker fund after the pandemic crash, here’s what I’d have now

Jon Smith explains the extent of his potential gains if he'd invested in a FTSE tracker fund during the Covid…

Read more »

Investing Articles

2 top shares I’ve bought for my Stocks and Shares ISA in November

This writer reveals a pair of fast-growing businesses that he's recently added to his Stocks and Shares ISA for the…

Read more »