Since the market crash of 2008/2009, The FTSE 100 and S&P 500 have produced very different results. Some of this is down to fundamental factors such as differences in revenue, earnings and dividend growth, but much of it is down to sentiment and valuation ratios.

For example, investors have been wary of the FTSE 100 over the last few years because of the eurozone crisis and Brexit. As a result, FTSE 100 valuations have remained relatively low compared to historic norms.

More specifically, the FTSE 100’s CAPE ratio (the ratio of price to ten-year inflation adjusted earnings) has been below average ever since the crash of 2008/2009.

In keeping with these low valuations, the FTSE 100 entered 2020 at a price of 7,450 and with a CAPE ratio of 15.6, slightly below its long-term average of 16.

When the world ran into a global pandemic the stock market reacted exactly as an experienced investor would expect: Fear and panic led to a record-breaking collapse of share prices, followed by a quick rebound driven by a more pragmatic revaluation of long-term expectations.

At the moment of maximum panic (March 23rd) the FTSE 100 fell below 5,000, a level it first reached in August 1997, almost 23 years ago.

With the FTSE 100 at 5,000 in March, that gave the UK large-cap index a CAPE ratio of 10.3. That’s significantly below its average of 16, implying that the FTSE 100 was probably very good value at that price, precisely because so many investors didn’t want to touch the UK with a bargepole.

To put that into context, I’ve included a chart of FTSE 100’s actual price through the first half of 2020 along with the spectrum of values it would have had at various historically achievable valuation (CAPE) ratios. 

The range of potential values extends from half to double the long-term average CAPE of 16, going from very cheap (shown in green, when CAPE is around 8) to very expensive (shown in red, when CAPE is around 32).