The market’s doubled. So what?

The MCX (FTSE250) is up 117% over a 5-year period. Less spectacularly, the UKX (FTSE100) is up 62% over the same period.

So we must be way overdue for a correction, right? Obviously it would be foolish of me to categorically rule out a correction or bear market. Anything can happen.

But consider this:
1. The market was at a very very low point 5 years ago,
so any recovery is bound to look dramatic. That 117% may therefore be less meaningful than is first supposed, as you are starting from a very low base.
2. 2011 was a down year, so the rise hasn’t been “inexorable”. Stockopedia reports that, over 3 years, the FTSE350 rose 13.03%. That’s a mere 4.2% pa. The drama was in the first 2 of those 5 years, not the last 3.
3. Stockopedia reports that the median forecast PE is 14.6. Earnings growth is estimated to be 14.7% – which admittedly is probably too high. It seems unlikely that corporate earnings will, in aggregate, rise by that high amount. Even if I factor out that growth, I get a PE of 16.7. That’s above historical norm, but not wildly so – especially if we do get strong economic growth.

So, it looks like the current market it its perfectly normal, uncertain self. The crystal ball into the future isn’t particularly cloudy, it’s just its normal cloudy self.

Everyone is predicting a correction. In fact, there *will* be a correction. We know that with certainty. What we don’t know is when that correction will be, and if now is a good time to get off the merry-go-round.

There’s the rub.

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About mcturra2000

Computer programmer living in Scotland.
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