The FTSE 100 just hit 8,000. But it’s still cheap!

Although it is only mid-February, 2023 is an important year for FTSE 100 index. After almost five years of waiting, the index finally broke the high of May 2018. Also, it broke another major milestone on Wednesday afternoon.

The FTSE 100 shed 8,000 points

At around 3.40pm this evening, the FTSE 100 briefly broke through the 8,000 mark for the first time. It peaked at 8,003.65, before falling back to 7,996.36.

But why is this a big deal? Why should one price level be more important than another? And doesn’t the rise in asset prices today lead to lower prices in the future?

I suspect that Footsie pushing over 8,000 has some significance. As humans, our psychology draws us round – and especially very round – numbers. Remember the big global party that celebrated the year 2000 and the start of the new millennium?

What’s more, the psychology of investors is also affected by a lot of positive news like this. Indeed, ‘momentum’ investors are more likely to buy as prices rise. So this news may lure more ‘dry powder’ – money sitting on the sidelines, waiting for an opportunity.

A quick history of Footsie milestones

Then again, the FTSE 8,000 has been around for a long time. At the end of 1999, the index closed at 6,930 – a record closing high. Then more than half during the dotcom crash of 2000-03.

The London market then rebounded strongly, reaching a post-crash peak in mid-2007. But then the global financial crisis brutally crashed the stock market again in 2007-09. After a long wait, the FTSE 100 hit a new record high of 7877.45 on 22 May 2018, before pulling back again.

The FTSE 100 moved up and down, and often sideways, until the spring of 2020. As the Covid-19 infection swept the world, global stock markets experienced a short and sharp crash. But thanks to massive fiscal and monetary stimulus, the index rose again.

Here’s how the UK’s main market indices have performed over these five timescales:

My table shows that Footsie produces positive results in all periods ranging from one month to five years. To be honest, I can hardly remember the last time I remembered this happening. In short, the index has dodged the meltdown seen in other major markets. But why?

I still see Footsie as cheap

I can give three reasons for the resilience of the index. First, it includes a number of mega-cap multinationals whose global earnings are largely immune to the UK’s domestic woes. Indeed, perhaps 70% to 75% of the index’s earnings come from abroad.

Secondly, the FTSE 100 is packed with ‘old economy’ companies, such as oil & gas producers, miners, banks and insurance companies. And these ‘boring’ value stocks largely avoided the collapse of tech stocks last year.

Third, I still see Footsie as cheap today, both historically and geographically. After all, it trades at a price-to-earnings ratio of 12 and yields 8.3%. It seems pretty cheap to me.

Finally, the FTSE 100 offers a dividend yield of almost 3.7% per annum, which is higher than the cash yield of other major markets. And that’s why I keep buying cheap Footsie stocks!