There are times when events in the stock market are headline news. This has happened recently, with the FTSE 100 reaching new all-time highs.
On February 3, the index ended the day at 7,901.8, surpassing the previous closing record of 7,877.45 set on May 22, 2018. Last Thursday (February 9), it hit another new high, closing at 7,911. ,fifteen.
What is propelling the Footsie to record levels? What actions have led the charge? And can it really be smart to invest when the market is as high as it is now?
Size Matters
The FTSE 100 is an index of the 100 largest companies in the UK, weighted by market capitalisation. Market capitalization is calculated by multiplying a company’s share price by the number of shares outstanding.
For example, at Footsie High on February 9, AstraZenecaIts share price was 11,390 pence and it had 1.55 billion shares outstanding. This gave it a market capitalization of £176.5bn and made it the largest company in the index.
The smallest constituent Fraser Groupit had a share price of 794 pence, £477.5m in shares and a market capitalization of just £3.8bn.
Due to capitalization weighting, the performance of the FTSE 100 is largely driven by the largest companies. To give an idea of the magnitude of this, the largest 11 companies currently account for 50% of the index, while the smallest 11 account for just 2%.
Intuition
In news coverage of the new Footsie highs, BBC economics correspondent Dharshini David explained: “The FTSE 100 is dominated by banking and energy companies, which have performed relatively well, the latter strongly driven by higher oil and gas prices.”
Intuitively, this sounds on the mark. After all, higher interest rates are a boon for banks. And we’ve heard a lot about “BP and Shell make ‘obscene’ record profits.”
However, intuition is not always correct.
Banking
At a recent all-time high, the banking giant HSBC it was the third largest Footsie company, with a market capitalization of £123 billion.
However, its share price and capitalization were 17% below their levels at the previous market peak of May 22, 2018.
And the story is similar for the other Footsie banks.
Oil
Shell (£171.6 billion market cap) and PA (£98.6bn market cap) were second and fifth in the FTSE 100 at their latest high.
The shares of the former were 10% lower and those of the latter 7% lower than at the previous peak. And since both companies have gotten rid of share buybacks since 2018, the declines in their market capitalizations were even steeper: 25% for Shell and 16% for BP.
The market capitalizations of HSBC, Shell and BP decreased by £103bn in total between the Footsie highs of 2018 and 2023.
Hero
If the bank and the oil giants had a negative impact on the FTSE 100 over the period, what drove the index to its new record levels?
The aforementioned big pharmaceutical company, AstraZeneca, has been a heroic champion for its shareholders and the index. On February 9, the closing price of its shares was 11,390 pence, 109% higher than on May 22, 2018.
The number of AstraZeneca shares outstanding has also risen, largely because a $39 billion acquisition in 2021 was a cash-and-stock deal. As such, the rise in the company’s market capitalization was even steeper than its share price. Its market capitalization increase of 155%, or £107bn, more than offset the negative impact from HSBC, Shell and BP.
support players
I would be exaggerating, but not by much, if I said that AstraZeneca has not only delivered to its shareholders, but also single-handedly dragged the FTSE 100 to its new all-time highs.
There have been some strong supporting players. Big Footsie miners have put a turn around for investors and the index in motion. red river (share price up 51% and market capitalization up £23bn), glencore (+39% and +£12bn), and Anglo-American (+79% and +£19bn) were ranked 7th, 8th and 11th when the index hit a new high on 9 February.
Other draws included the drinks giant in sixth place Diageo (+29% and +£12bn), and fifteenth place London Stock Exchange Group (+69% and +£23bn).
Another fresh high
I posed the question at the top of this article: can it really be smart to invest when the market is as high as it is now?
I have two comments. First of all, investors who bought companies like AstraZeneca, big mining companies, Diageo and the London Stock Exchange on May 22, 2018 are probably chuckling right now.
And second, as I prepare to shelve this article, the FTSE 100 has just closed at another new high of 7,947.6.
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