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• Collective reader predictions:- The FTSE 100 in Dec 2011

This is Money Editor Andrew Oxlade takes you through the rollercoaster ride of recent UK stock market fluctuations. We tell you:• The history• Who predicted the crash• What to expect next

Latest:›› Japan crisis: Are UK shares oversold? (19 March)›› is the UK stock market undervalued? (11 March)›› Expert who called the rally says FTSE 100 still ‘cheap’ (16 Feb)›› Shares confidence hits 10-year high … making some investors nervous (15 Feb)

Summary: The story so far

The upbeat mood in stock markets came to an abrupt halt in March when first unrest in the Middle East sent the price of oil soaring and then the earthquake in Japan created far greater doubt about prospects for the world economy. The FTSE 100 responded by losing 7% in two weeks – from 3 March to 16 March.

Before that, it was a different story. The Footsie’s total rally to the mid-February 2011 high of 6091, represented an incredible 73% recovery from the low of 3512 in March 2009.

Last year was a decent one for shares, not as good as 2009 but pretty health all the same, with the FTSE 100 racking up a near-10% rise. It would have been much bigger if not for BP’s Gulf of Mexico oil spill: BP was the index’s biggest stock. The gain for the FTSE 250, in contrast, was 24%.

Emerging markets have done even better in recent years. The FTSE Emerging Latin America index [FT chart], rose 87% in 2009 and a further 13% in 2010 and in 2011. But jitters in the Middle East and worries that the likes of Brazil and China may be overheating means these markets have not done so well in 2011.

The rally was supported by companies revealing better-than-expected profits. That may be more difficult later in 2011, at least in the UK, when government spending cuts kick in.

Shares have also thrived because interest rates are so low – that has made it cheap for companies to operate.

The tough choice for central governments in 2011 is whether to raise rates to control inflationary pressures, which have become especially intense in the UK.

But raising rates could slow business investment and would heap pressure on the banks: if house prices were to fall as a result of higher borrowing costs then bad debts would increase for banks and it could all start another crisis. such a scenario would be very bad news for stock markets.

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›› 30-second guide: Beware stock market predictions (including ours)

What next for shares?Latest views from the best financial pundits

One of the City’s new prophets is Dylan Grice at SocGen. He, along with colleague Albert Edwards, have established feted status of late for making some thought-provoking assertions.

Most recently, they suggested the US stock market is 50% to 60% overvalued against the long-term average and that investors have now missed the boat with pumped up emerging markets.

Edwards has warned before. In August 2010, he predicted an ‘equities bloodbath’.

Nouriel Roubini – the so-called Dr Doom who predicted in 2006 that the world would suffer a bank-induced meltdown – warned (2 Nov 2010) that house prices would fall further and economic growth would be anaemic. Previously, he warned global shares will fall 20%.

• Central banks will stimulate economies with printed money at the slightest hint of trouble, and this has the side-effect of increasing demand for assets such as shares;

• The economic recovery was more V-shaped than expected and that may continue, improving company profits and pushing up share prices;

• Shares look very cheap vs bonds. when FTSE 100 dividend yields exceed 10-year government bonds, it means shares are a buy. this happened in late summer 2010. others say this measure is flawed because bond yields are depressed by low rates and QE;

• Inflation is on the rise and a period of gentle price pressure can be good for equities.

• Japan’s earthquake crisis will disrupt global supply chains and undermine economic demand

• The good news is all factored into prices. Investors, with optimisim at a 10-year high, are too confident.

• A fresh boom in China helped pull the world economy back from the brink. That economic charge may be slowing – the jury is out;

• A recovery in house prices has ended. A second wave of falls, leading to more bad debts, could spark another waves of bank failures or another credit crunch;

• Governments took on too much debt in the boom years, and bad debt from banks, and some could fail to meet repayments;

• Spending cuts in the UK could hamper demand, if creates greater unemployment;

• Deflation may take hold, leading to a falling spiral of consumer and asset prices, including shares.

The bottom line is that many Western governments are sitting on massive debts – paying those down will erode economic growth for many years [Why the FTSE 100 may still be at 5000 in 2020]. Some countries, such as Greece, may be already caught in a recessionary debt spiral.

And the UK stock market, when compared to earnings, actually trades below its long-run average – around 21% in August 2010, according to Capital Economics [Source: Citywire]. That, of course, assumes that analysts are right with their estimates for earnings.

But Money Week’s Merryn Somerset Webb (pictured right) says shares are overpriced based on ‘the only reliable indicator of market performance’. The cyclically-adjusted price-to-earnings ratio (CAPE) suggests the US market is not remotely cheap. CAPE is currently 23 times, significantly above its long-term average. and that was before the recent rally.

On November 5, she noted that the UK market yield was only 3% against an average of 4.4% over the past 90 years, making it considerably more expensive than the long-run average. However, she does recommend buying defensive stocks as a protection against inflation.

She has declined to give us a FTSE 100 prediction for 2011 but told us (27 Dec): ‘While I very strongly suspect that the FTSE 100 is overvalued on CAPE it is hard to say by how much as as far as I know, no one compiles these numbers for the UK in the same way they do for the US (which according to Andrew Smithers is overpriced by 70% or so on both CAPE and Q).

‘However, even if we could say for sure by how much it was overvalued it would I’m afraid help us very little as CAPE, while a fabulous long term indicator, is utterly useless in the short term. Basically my view is that while value always asserts itself in the end, thanks to QE buybacks and so on [which distorts the market], it will be little guide to the market moves of the next couple of years.’

Bill Bonner, a pathological pessimist who correctly called the decade-long bull market for gold, is also bearish. He says the stock market is undergoing a long correction and suggests there’s another six years to run.

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The FTSE 100 in the last decade:

The FTSE 100 ended the Noughties 22% below where it had started, despite a 22% rally to 5412 in 2009. A 53% rally from its March low of 3512 helped. But if you throw in dividend income, the FTSE 100 returned a total of a little less than 7% in total over the whole decade. Read more on the FTSE in 2009

The factors behind the 2009-10 rally:

• Quantitative easing and bank bailouts boosted confidence;

• Slashed rates and money printing enabled companies to borrow cheaply;

• Companies slashed costs, boosting profits

• A global depression scenario (Jan-March 2009) was replaced by more measured concerns.

The best from around the web

Financial Times – Guest columnist – 23 MarchEquity bull rally is just pausing for breath (US shares to rise 60% by 2013)

The Economist’s Buttonwood – 18 FebruaryUS shares are 45% overpriced – but they may keep rising

Risk.net – 18 JanuarySocGen warns on overvalued stock markets

Broker smithers.co.uk – 8 DecemberWhy the US stock market is 74% too high

dailyreckoning.co.uk – 5 NovemberShares will fall for six years

Marketoracle.co.uk – 4 NovemberStock market ‘insiders’ head for the exit

Zerohedge.com – 26 AugustWhy share investors are in for a rude shock

• Stock market predictions and tips for 2011• Stock market ‘bloodbath’ lies ahead• Bank of England report: shares to fall 20%• Roubini warns global shares will fall 20%• Star manager Ted Scott’s fears for the market• The no-win scenario for shares and property• Reasons why shares may fall in 2010• Read more on whether the stock market is overvalued

This commentary was written by Editor Andrew Oxlade and updated each week or as market events dictateTwitter: @andrew_oxlade

The FTSE 100 over the past year

We aim to gather views that matter, from those with a proven track record of calling the market right, or at least those who get it right more than the norm:

• Key bullish views:›› Warren Buffett: ‘Shares are far cheaper than bonds’

• Key bearish views:›› bill Bonner: Stocks are at the beginning of a major adjustment – another six years›› ‘Dr Doom’: Rally reversal in late 2010 [More Roubini gloom - June 2010]›› Shares guru Woodford warns on, er, shares›› The Economist warns on shares ‘bubble’›› Ditch shares, says prophet of doom IFA›› why the market is 20% over-priced

It’s also worth keeping an eye on the Roubini index [thestreet.co.uk]

• The inbetweeners›› Bolton (right) was bullish. now he’s not›› Speculator Jim Rogers: UK economy is dead. So go east!

›› How to spot when a bear market turns bull

Commentary from Editor Andrew Oxlade

The five-year share boom (since the 3250 Footsie low of March 2003) ended on 21 January 2008 when the FTSE 100 endured its biggest fall since the 9/11 attacks of 2001, crumbling from 6400 points to less than 5600 within a month. The trigger had been the collapse of of US investment bank Bear Stearns.

The credit crunch, which began in August 2007, had until then been a phoney war for shares. all is explained here: Credit crunch explanation

Even after that, markets enjoyed a powerful recovery from mid-March to mid-May, with the Footsie rising nearly 20% to more than 6400 points. It was a ‘Wile E Coyote’ moment, legs spinning and running off a cliff.

The root of the problems went back a decade. Excess money from the cash-rich Chinese and far East economies sloshed into Western nations, fuelling a consumer boom based on debt. this was stoked further by interest rates being set too low in the West.

The first signs of stress emerged in ’sub-prime’ mortgage lending in the US. The banks, which had done all the lending, suddenly woke up to the serverity of the crisis at the end of summer 2008, with the collapse of Lehman Brothers. The FTSE 100 plunged from 5600 at the start of September to below 3800 by early November.

The episode had already sparked a severe recession. The FTSE 100 fell more than 10% at one point on 10 October. Personally, I was enticed back to investing again on 12 October in bombed out emerging markets. why I invested. Warren Buffett gave the markets some support by revealing on 16 October that he was bullish and buying US shares.

The Footsie bounced, then fell again to a five-year low of 3,512 in March 2009. It contined to rise with an 8% increase for April – the biggest surge for six years. It also became an official bull market, having risen 20%. In late July, the FTSE 100 managed an 11-day winning streak, matching a record achieved in 2003 and 2004. The third quarter saw a 21% rise – its biggest ever.

The FTSE 100’s roller coaster since the mid-Nineties

Who predicted the shares slump?

Back in 2007, when markets remained fairly oblivious to the growing storm, we reported (see below) on warnings of bad times from emminent financial pundits.

These are people with a track record of successful investing (and I’ve also thrown in some of my own views). However, take all stock market calls and predictions with a pinch of salt (30-second guide: Beware stock market predictions) as even the world’s most revered stock-pickers get it wrong. Read about UK managers making the wrong calls.

The bottom line is that markets, by nature, are erratic and unpredictable. Nassim Taleb explains this well with his Black Swan Theory | Don’t miss: A 30-second guide to Black Swan Theory

For my part, I have UK fund investments but more money invested in emerging markets – a higher-risk strategy: Latin America | why I like emerging markets. I believe these regions will now pick up the baton from developing countries (see below). It’s paying off so far (April 2009).

This is Money has long been an advocate for sticking with equities over the long-term. See our share school. if you’re unsure, talk to an independent financial adviser (find an IFA). you may also like to try this quick investment test ‘Should you sell?’

This special report pulls together the latest reports, expert views, analysis and advice. you can also put yourself a step ahead of other investors with our newsflash alerts. We will email you when the market plunges or soars.

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- this is Money’s Dan Hyde gives a full plotted history of stock market crashes since 1720.

- and we explain how this crash compares to 1929 and the depression that followed (Oct 2008)

A selection of views from BEFORE the stock market falls of 2008

›› Jeff Prestridge: I’m following the smart moneyWe reported of a warning of an imminent collapse of equity markets akin to that of 1973 and 1974, when the UK stock market fell by 73% (Dec 07).

›› FTSE 100 ‘could fall 1,200 points in 2008′Morgan Stanley’s warning was spot on. and don’t miss a full round-up of predictions from December 2007.

›› Shares guru warns of crashAnthony Bolton, arguably the UK’s best stock-picker, warned of dire times. But he first warned (prematurely) of a crash in 2006 (Jan 2008).

›› Sex, population and the predicted share crash of 2008In 2002, we highlighted a theory that claimed to accurately forecast stock markets. The prediction? A prolonged slump in shares and house prices to begin in 2008. [Updates on this].

›› Soros and Greenspan warn ‘US faces crisis’Former Federal Reserve Chairman Alan Greenspan and billionaire investor George Soros warned of a serious crisis ahead (Nov 07).

›› Buffett warns on derivatives in 2003Yes, of course the greatest investor of our age had seen it all coming years before, warning of ‘financial weapons of mass destruction’.

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Natale Gaze – Stock market predictions: What next?

Wait for it. Jim Rogers is… *gasp* bullish on commodities still! Now, who would have ever guessed that?! On a serious note, he still is adamant that 1999 was the start of the commodity bull market and he is bullish on the prospects. What’s interesting is that he fully admits it will be a bubble at some point, but he’s not worried about that right now as that’s a ‘way’s off.’ this interview comes after we saw Rogers recently start some short positions as he wagers the market is overdue for a correction.

Of course he also thinks gold is going up and he expects it to be at $2,000 at least by the end of this decade, if not higher. In the past we’ve posted up plenty of hedge fund research on gold, all of which we recommend checking out. he recently sat down with Bloomberg to discuss his most recent thoughts on April 7th. If you come to the site, below you’ll find an embedded video of his quick interview:

So, he’ll continue to ride the longer term trend that he feels is in-tact here. Rogers isn’t a big believer in market timing and he’ll gladly wait out the trend over the long-term. we check in on Rogers from time to time just to see what he’s saying, but he appears in the media quite often, re-iterating a lot of his views anyways. Keep in mind that Rogers and George Soros previously managed the highly successful Quantum Fund and have since gone their separate ways. Head over to see Rogers’ recent rationale for starting short positions as well as our coverage of George Soros’ hedge fund portfolio.

Jim Rogers Still Bullish on Commodities ~ market folly