FTSE 100: is the UK’s premier index detached from economic reality?

The FTSE 100 is at 7,586 points, up 1% year-to-date and just below the 7,675 points it was worth on 17 January 2020 before the covid-19 pandemic struck.

FTSE 100 futures: energy, mining, and banks

On the surface, it’s all roses for the FTSE 100. The Bank of England has raised the base rate to 0.75%, and Capital Economics believes it will hit 2% by the end of 2023. This could spell vastly increased profits for ‘big four’ banks, HSBC, Lloyds, Barclays, and NatWest.

Meanwhile, Brent Crude, which was already rising as a result of a supply crunch and heightened post-pandemic demand, has soared to a multi-year high as a result of the fallout of the Russia-Ukraine war. This is shoring up support for BP and Shell.

And FTSE 100 miners Glencore, Anglo American, and Rio Tinto are all benefitting from the rising demand for metals as commodities from Russia and Ukraine collapse and the mining supercycle continues to gather pace.

It appears the FTSE 100 could outperform the S&P 500 and NASDAQ Composite this year. Money continues to leak out of growth stocks into the traditional safety of what Scottish Mortgage’s James Anderson has called the ‘19th century index.’

But this could be a deceptively optimistic viewpoint.

FTSE 100: consumer goods, healthcare, and travel

The Consumer Prices Index inflation rate is at 6.2%, with prices going up at their fastest rate in 30 years. The Office for Budgetary Responsibility (OBR) believes it could hit 8.7% in Q4, and the Bank of England (BoE) believes it could go even higher.

Governor Andrew Bailey has warned the ‘shock from energy prices this year will be larger than any single year in the 1970s.’ Already, fuel bills for the average household have risen by 54% to £1,971 a year. Moreover, they are widely expected to increase further in October.

And despite the 5p/litre fuel duty cut, fuel remains at record levels. Martin Lewis argues he is ‘virtually out of tools’ to help and says political intervention is required.

In addition, consumer resilience is falling. Office for National Statistics (ONS) figures show wages have risen by 4.1% compared to a year ago. But this represents a real terms 1.3% fall overall and a 3% drop for public sector staff.

Taxes are increasing too, both for individuals and corporations. Income tax bands are frozen until 2026, dragging more people into higher tax bands as wages rise. And the National Insurance 1.25 percentage point increase is only being weathered by Chancellor Rishi Sunak’s adjustments in July.

Dividend tax is also up by 1.25 percentage points, hitting the profits both of investors and the self-employed. Corporation tax is rising from 19% to 25% in April next year. Even VAT, which was cut to 12.5% in July 2020 for hospitality and tourism firms, has now returned to 20%.

Overall, the OBR claims the UK is facing its highest tax burden since the 1950s, with household tax take at 36% of GDP.

Highlighting the problem, employers added just 35,000 people to payrolls in February. And according to the Insolvency Service, planned redundancies have more than doubled over the last month, rising to over 18,000 in February. Worrying, the banking sector is leading the charge, planning to sack 5,400 workers.

Discretionary spending could be about to collapse. BoE figures show individuals borrowed £1.9 billion in February, compared to £1 billion in February 2020. And house purchase approvals fell to 71,000 from 73,800 in January.

FTSE 100 consumer companies including Unilever, Reckitt Benckiser, and Diageo will bear the brunt.

Indeed, the British Retail Consortium reports that shop sales only rose by 3.1% in March, down from 6.7% in February. And CEO Helen Dickinson says the ‘enormous challenge’ for consumers is ‘likely to be reflected in retail spend in the future.’

Meanwhile, FTSE 100 travel stocks like IAG are suffering from pandemic-induced chaos, with hundreds of flights already cancelled. Rolls-Royce has been downgraded by JP Morgan from neutral to underweight. And border guards say the ‘significant problems’ could last into the crucial summer season.

Moreover, Sunak argues it’s ‘crucial that we don't allow debt to spiral and burden future generations.’ Interest payments on government debt hit a record £8.2 billion in February, while public sector debt is at its highest since the 1960s.

And the economy only expanded by 0.1% in February, compared with 0.8% in January. Capital Economics’ Ruth Gregory expounded she ‘hadn’t expected it to slow so much so soon.’

With bills, taxes, and inflation all rising, the FTSE 100’s recovery may be built on sand.

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*Based on revenue (published financial statements, 2022).