Is the FTSE a true gauge of the market?

By Adam Shaw Presenter, Working Lunch

We talk about the market doing well when the FTSE 100 stock index is up.

But the FTSE 100 is not an index of equals. It is a highly biased measure of what is happening on the stock market.

Oil giant BP, for instance, accounts for over 8% of the index and the top five companies account for about a third of the index's value.

This means that changes in the price of just a few shares can have very large effects on what happens to the FTSE.

The situation is even worse in the US, where the Dow Jones index has only 30 members.

In France, the main stock market index, the Cac, has only 40 members and in Germany's most widely followed index, the Dax, has only 30 members.

As a result, we should all be wary about making conclusions about the investment world by looking at the indexes themselves.

Digging deeper

The average performance of the stock market can hide some very substantial moves in specific sectors.

In the past couple of months, the UK stocks have done well, despite concerns about a slowdown in the economy and fears of recession. The FTSE 100 index has risen from 5,400 to above 6,200.

However, if you dig deeper behind the numbers, you see quite a different picture.

Between 17 March and 7 May, the FTSE 100 rose 15%.

It was pushed higher by a massive rise in oil and mining shares.

During that period, Tullow Oil rose 47%, BHP Billiton climbed 32% and Rio Tinto increased 25%.

However, amid all the riches, they have been some big losers. Shire lost 12%, Persimmon fell 7% and the London Stock Exchange itself shed 5%.

Annual performance

The difference in the performance of different sectors is even more obvious if you look at the market over the past 12 months.

Tullow Oil has increased in value by 155% over the past year and Cairn Energy has risen 98%.

However, there has been a collapse in value in the housing sector, which is not obvious in the FTSE index itself.

Wolseley, which is the largest plumbing supplies group in the world, has lost 57% of its value.

There have been harsh times in the banking sector, with Alliance and Leicester and HBOS both losing 53% of their value.

And in the retail sector, Marks and Spencer has been one of the worst performers, losing 47% of its value.

It is, of course, good news that the FTSE has managed the economic downturn relatively well.

But much as I hate to bring bad news, the headline figures don't tell the whole story and without the help of mining and oil shares in particular, we would be seeing a very different performance.

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