The FTSE 100 at 5,000 or 10,000: Which is more likely in the next 5 years?

Now that the FTSE 100 has broken through the 7,000 barrier investors can finally set their sights on something more interesting: The big 10,000.

Obviously, this isn’t going to happen overnight. From where the FTSE 100 is today it would take a 43% gain to reach that giant milestone and you just don’t get gains like that in a year or two unless the market is coming out of a bear market bottom, which it isn’t.

On the other hand, we could see another bear market if the global economy starts to deteriorate, or if something else gives investors the jitters.

So which is more likely in the next 5 years: A bull market to 10,000 or a bear market to 5,000?

Forecasting the FTSE 100 using charts

Using price charts is a popular way to get a feel for where an index or a company’s share price might go in the short and medium term. While I don’t use charting techniques myself, I think there is definitely some merit to it.

You only have to look at the chart below from Google Finance showing the FTSE 100 over the past 15 years to see that:

FTSE 100 Chart 1996 - 2015

There is a clear pattern where the FTSE 100 bounces back and forth between 3,500 and 7,000, up and down and up and down and finally up again to around 7,000 today.

With that pattern in place, if I ask my 5-year-old son which way the line will go next I can pretty much guess he’ll say “down”.

So from a charting point of view (or at least my point of view as a non-chartist) the market is more likely to fall to 5,000 than soar away to 10,000.

In fact, the chart hints that we might even see 3,500 for the fourth time in 20 years. How depressing is that?

But that isn’t the end of the story. There are other ways to forecast which way the FTSE 100 will go and my preferred approach paints a very different picture.

Forecasting the FTSE 100 using its dividend yield

One way to think about whether 5,000 or 10,000 is more likely in the next 5 years is to think about how those levels would affect the FTSE 100’s dividend yield.

The first thing we need to do is look at how the FTSE 100’s yield has changed over the years so that we can guesstimate what a “typical” or “normal” range of values is.

FTSE 100 Dividend yield over 30 years

Since 1985 the yield has almost always been between 3% and 4%, apart from during the dot-com mania of the late 1990s where it fell to almost 2% and the depths of the financial crisis in 2008/9 where it climbed above 4% for a short while.

I should point out that the chart is based on a snapshot of the yield at the end of each year, and so for example the market’s dividend yield actually reached more than 5.5% at the bear market bottom in March 2009.

However, the data in that chart is more than good enough for this thought experiment. The FTSE 100’s yield is almost always between 3% and 4% and any value outside of that is usually short-lived.

Yesterday the index stood at 6,950 with a dividend yield of 3.42% (according to the FT’s Data Archive and “World Markets at a Glance” report). That means the dividend was 238 in terms of whole index points.

If the FTSE 100 collapsed to 5,000 tomorrow it would end up with a dividend yield of 4.8%, which is well outside the “normal” range. The implication is that 5,000 is unlikely at the moment, at least from a dividend yield point of view.

Going the other way, if the market shot up tomorrow to 10,000 the dividend yield would drop to 2.4%, which is also outside the “normal” range. Again, 10,000 is an unlikely value based on the size of the current dividend.

So they’re both unlikely, but which is the more likely of the two at the moment? 

Looking at the dividend yield chart it seems to me that a 2.4% dividend yield is more likely than a 4.8% yield (which isn’t even on the chart), so right now I would say that 10,000 is the more likely figure in the short-term.

For a 5-year forecast I’ll have to make a couple of assumptions about:

  1. Inflation – I’ll assume this runs at 2%
  2. Real dividend growth – I’ll assume the FTSE 100 dividend grows 1% faster than inflation

Combining those two assumptions gives a baseline nominal dividend growth rate of 3%. I don’t think that’s particularly optimistic and is in fact slower than the historic average.

So with those assumptions in mind, the table below shows how the dividend would grow and how the dividend yield would change with the FTSE 100 at either 5,000 or 10,000 (and I’ve included 7,000 as well so you can see what might happen if the market stays where it is today).

YearDividendYield at 5,000Yield at 7,000Yield at 10,000

As the market’s dividend grows each year the yield at each price level goes up as well, of course.

So if we’re unlikely to see the FTSE 100 at 5,000 today, because that produces a dividend yield of 4.8% which is outside the “normal” range, then by 2020 it becomes incredibly unlikely that we’ll ever see the market at 5,000 again.

Economic growth and inflation combine to push the dividend up to the point where we’d have a 5.5% yield at 5,000, which is just not conceivable outside of a major crash.

But over time the 10,000 level becomes more and more realistic, just as the FTSE 100 at 7,000 has over the past decade. By 2020 the index at 10,000 could have a dividend yield of 2.8%, which is only very slightly outside the normal range.

Looking at the dividend yield chart above, the 2.8% level was either reached or breached by the end of 1986, 1993, through the whole of 1996 to 2001, and then again in 2006 and 2010.

So a 2.8% yield is not spectacularly low, which means that 10,000 is an entirely reasonable possibility by the year 2020.

Of course, the FTSE 100 may not reach 10,000 by 2020, but if it doesn’t that’s not necessarily a bad thing.

Even if the market stays at 7,000 until the end of the decade, investors are likely to receive higher yields as the years go by. That means they get a better income or more dividends to reinvest, and either way that sounds like a win/win situation to me.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

9 thoughts on “The FTSE 100 at 5,000 or 10,000: Which is more likely in the next 5 years?”

  1. Interesting and enjoyable run down on this, John.

    I wonder whether an inflation-adjusted look at the FTSE 100 price chart would throw off anything interesting regarding trends? I am not sure I have ever seen one!

    I have no idea which way it is likely to go. However, as you note, 10,000 seems more likely than 5,000. How much that is worth is a different matter altogether!

    Thanks for writing this up.

      1. I have bumped into his site quite a few times (indeed, he has featured on my weekly round up lists a few times just as you have!). I had not seen that particular post though! Thanks for posting it.

        I will read it immediately!

        There are quite a few people getting close to their FIRE endpoint. Pretty neat. Always nice to read their progress!

  2. A fascinating article. I also agree that it is more likely that the FTSE will be at 10k rather than 5k. I guess as long as no major disasters occur, I’m sure we’ll be closer to 10k than 5k in 5 years’ time.

    1. Hi M, agreed. I wanted to put up something that looked a bit further out than the usual “will the FTSE end the year at 7,100?” type of thing. That’s just too short sighted.

  3. Hi John.
    Focusing on one statistic alone can lead to an incompelte analysis. Sebastian Lyon recently gave an interview to MSW at moneyweek and noted that dividend distributions as a % of company profits have recently gone from 35% of profits to 65% ( i don’t know the long run average). It is also worth considering that profit margins are also historically high.
    I think it would instructive to consider what would happen if these two variables returned to their long term average over a 5 year horizon. My guess is that dividends could half and hence 5,000 may be more realistic than 10,000. What do you think?

    1. Hi Stephen, of course you’re right that focusing on the dividend alone is an incompletely analysis. In fact any analysis, even a PhD thesis on the subject would be incomplete, but I do think the yield analysis is useful if somewhat simplistic.

      Your point about dividend cover being relatively thin is also right. It’s something I’ve written about a few times in the past, e.g.:

      So perhaps dividend growth will be very slow for a while, perhaps zero in real terms. Of course if you change the input assumptions then the numbers will come out differently, but I think it would be a stretch to say that dividends could halve and that 5,000 is the more likely case – unless you make an assumption about a global crash, which for me would effectively be pure speculation.

      I’m not a macroeconomic expert, so I prefer to think in terms of historic norms such as dividends growing at inflation plus a percent or two rather than whether or not they might halve. Thinking about whether or not dividends might halve would require some insight into whether or not we’ll have a global crash, and unfortunately I have no such insight!

      Actually a final thought is that James Montier at GMO has done some work into what the markets might look like if profit margins normalised, but I can’t remember the paper offhand. There are others who think the high margins are sustainable though:

      I have no opinion either way.

  4. Hi John,

    I enjoy reading your posts and receive your weekly news letter, thank you.

    Just a quick observation – I recently came across on commentator who stated a “Real Annual Dividend Growth Rate” for the FTSE 100 of minus 6% for the next 5 years (you may be aware of who I mean as I know you are widely read).

    How would that figure in your thoughts?


    1. Hi Norman, I can’t remember offhand who might have said that, but it certainly seems a bit pessimistic. 6% for 5 years is almost a 30% decline overall and we haven’t seen a decline anywhere near that much in at least thirty years.

      I’m not saying it can’t happen, but it seems very unlikely.

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