Ever since Bernanke opened his mouth about potentially easing back (not stopping) on the amount of Quantitative Easing he is undertaking each month we've seen the price of many asset classes fall. This has included the FTSE100. Am I worried about it? Well as a person who is investing large amounts every month into the markets the answer is no. I hear you ask why. Well if I use the FTSE100 as an example I’ll show today that both company earnings and
dividends are rising. Therefore a falling price combined with rising earnings and dividends simply means a higher dividend yield and earnings yield. That means that I'm simply buying the market at better value.
Let’s now run the numbers. The last time we looked at this dataset was on
the 30 April 2013.
FTSE 100 Price
In early morning trade today the FTSE 100 was priced at 6,160. That is a fall of 4.5% when compared with the 01 May 2013 Price of 6,451. It’s still 17.1% above the 01 June 2012 Price of 5,260. How this pricing compares with history can be seen in the chart below.
Click to enlarge
This is a similar chart to that which you will see in many places within the mainstream media. Let’s now remove the sensationalism by:
- Correcting the chart for the devaluation of the £ through inflation. For this dataset I use the Consumer Price Index (CPI) to devalue the £.
- Plotting the Pricing on a logarithmic scale as opposed to a linear one. By using this scale percentage changes in price appear the same.
Looking at the chart this way reveals the FTSE 100 in a very different light. That light shows that the
compound annual growth rate (CAGR) in today’s £’s has only been 1.7%. Correct it by the Retail Prices Index (RPI) and that falls to 1.0%.
Click to enlarge
FTSE 100 Earnings
As Reported Nominal Annual Earnings are currently 504, up from 481 on the 01 May 2013. They are down 10.4% on last year and down 19.8% on October 2011’s peak of 628. Or course this looks better than it really is as inflation flatters the result. I therefore plot a chart below, again on a logarithmic axis, showing Real (inflation adjusted) Earnings performance over the long term.