Why the FTSE won't fall by 30pc

What are we to make of the FTSE 100’s worst start to a year on record?

It’s a mug’s game trying to predict what the market will do over the following days and weeks, given that the current level of the index represents, as always, the aggregate actions of countless investors.

But I’ll venture a couple of thoughts of my own.

First, the focus as ever has been on the blue-chip index. But the FTSE 100 is rather an unusual animal, being so heavily influenced by international oil firms and miners – the two sectors that have taken a real hammering thanks to the recent precipitous fall in commodity prices.

Over the past month the FTSE 250, which is much more representative of the domestic economy, has fallen far less sharply.

Investors who have money in FTSE 100 tracker funds may want to reconsider. Remember that you may hold trackers in your corporate pension fund, where their low cost and simplicity are making them increasingly popular.

Further into the future, however, there are strong arguments that commodities will eventually rally – many mines and oil wells have closed following the price falls and supply is declining as a result.

So you may want to return to your FTSE 100 trackers in due course to profit from such a recovery.

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In passing, this is another illustration of how the arguments for trackers fluctuate with market conditions and why smart investors do not align themselves too fervently with the “pro-tracker” or “anti-tracker” camps.

The other aspect of the market I would call your attention to is the income it pays. The FTSE 100 yields about 4.2pc. If, as some pessimistic commentators have suggested, it fell by 30pc, the yield would leap to about 6pc.

This is the kind of income that many savers would kill for: it is 12 times the Bank Rate and about double what you can make on the longest-term savings accounts.

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Any flood of new money into the stock market from such income-seekers would tend, of course, to make the index recover.

Yields of 6pc are also not available in the bond market unless you stray into “junk” territory, which for me at least is a scarier place than a stock market that is thousands of points below its high.