The FTSE 100 index has had a pretty good run in 2021. The UK’s blue-chip index is up 1% over five days, 4.5% over one month, and 3.1% over six months. It has also gained 11.7% this calendar year and almost a quarter (+22.6%) over one year. But the Footsie has had a poor half-decade, rising by a mere 2.8% over the past five years. (All these figures exclude dividends, which account for a significant proportion of long-term returns from UK stocks.) But what might happen to the index in 2022?
The FTSE 100 goes nowhere
It’s also worth noting that the FTSE 100 has barely budged this century. At the end of 1999, the Footsie hit a record closing high of 6,930.2 points. As I write, it hovers around 7,215.99, for a gain of just over 285 points (+4.1%) in almost 22 years. That works out at a truly terrible return of under 0.2% a year (excluding dividends). So much for the benefits of long-term investing. However, adding in cash dividends of say, 3.3% a year takes this figure to 3.5% a year. At least that’s better than nothing.
UK stocks look cheap to me
Today, I would argue that the FTSE 100 looks far from expensive. The Footsie trades on about 15 times earnings and an earnings yield of 6.7%. It also offers a forecast dividend yield of around 4% for 2021. While the rest of the world keeps blowing market bubbles, these fundamentals look cheap to me. But compared to the US, the UK market is a mere minnow — and that worries me.
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Today, the total market value of all London-listed stocks (including the FTSE 100) exceeds £4.5trn ($6.2trn). But this is tiny in comparison to the US, where total market value is over $46.4trn (£33.8trn), using the Dow Jones US Total Stock Market Index. That’s more than double the value of US stocks during the lows of ‘Meltdown Monday’ (23 March 2020). In fact, US stocks now account for around three-fifths (60%) of the FT World Index, according to Philip Coggan writing in the Financial Times last month.
What next for the Footsie?
One old stock-market saying goes something like this, “When the New York market sneezes, London catches a cold”. Today, the US S&P 500 index trades on 30.5 times earnings and an earnings yield of 3.3%. Also, it offers a dividend yield of a mere 1.3% a year. Another time I can clearly remember US stocks being so highly valued was at the height of the 90s boom. And this was just before the dotcom crash started in March 2000. So when I worry about the FTSE 100 and the wider London market, I’m really worrying about New York.
Despite the FTSE 100’s fundamentals looking good to me, I still worry that the Footsie might have a disappointing 2022. Worries around ‘sticky’ inflation, rising oil & gas prices, higher interest rates, and slowing global growth might dent investors’ optimism. Likewise, hefty US stock valuations could trigger a full-blown stock market crash next year. And if the US enters a bear (falling) market, then the UK will surely follow.
Finally, whatever happens in 2022, it won’t stop me from buying cheap stocks. Indeed, if another market meltdown does come along, I’ll do exactly what I did in the spring of last year. I’ll pump every spare penny we have into buying cheap shares at newly discounted valuations. Being bold during periodic market crashes has boosted my family wealth enormously, so I’ll keep my nerve in 2022!
