Take into account inflation, and the FTSE 100 no longer seems so high
Much attention is being paid to the FTSE 100 currently. Despite the recent correction, many commentators are highlighting how close the index is to its all-time peak, 6930, and are therefore urging caution.
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Yet I’d humbly point out that a broader perspective is needed. Yes, the FTSE 100 is approaching its nominal high – but that overlooks the effects of inflation, which have played a huge role over the past generation.
Aboutinflation.com illustrates the point. The blue line shows the FTSE 100’s nominal values which everyone quotes, while the red line exhibits the inflation-adjusted reality.
The quickest of glances shows that the FTSE 100 is currently well below its 15 year high. Both 2007 and 2000 were more heady and, if one looks back even further, as below, one sees that we are exactly where we were in 1997 when Tony Blair was walking into Downing Street.
This leads me on to three quick statements:
First, on a positive note, today’s FTSE 100 looks affordable on a historical basis, especially if you take earnings into account.
Second, and perhaps more sobering, historic equity returns are clearly not as good as the public thinks, given values are at 1997 levels.
Third, dividends are the main driver of equity outperformance — so as tempting as it is for investors to siphon off income, it is best not to in the long run.