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Guessing game

It is about this time of the year that superstitious investors start getting nervous. Should we sell into this rally, they will be saying to each other? And we have had a decent rally. As we flirted with 6,100 on the FTSE 100 Share index last week, the market had recovered by around 13 per cent in just six weeks. The recovery took the market to within 10 per cent of the peak attained in June last year.

That was the position last week. Heaven knows what it is now. Volatility remains the bane of investors’ – and market commentators’ for that matter – lives. With bank and resource stocks each contributing to the wide swings that have taken place or cancelling each other out, as they have on a number of occasions, guessing what the market may do in the very short term is far from easy.

The big issue remains, will the slowdown in economic activity translate into falling profits? If so, will the valuation level on which equities stand suffer to the extent that a market correction becomes inevitable?

My money remains on the central banks bailing us out at the expense of inflation but not all who follow the market are as confident that they can prevail. One now retired fund manager with whom I lunched last week was so convinced that a reckoning was in the offing that he had bought an out of the money put option on the market. His prognosis was a worldwide economic slump and a fall in corporate earnings, leading to a necessary downward revaluation of equities.

But the authorities know this. They are better equipped to manage their way out of the sort of problems that might arise, even if these problems are necessarily more complex than used to be the case. And governments are only too aware that the general public is better informed and less forgiving than in the past. Politicians need to be re-elected. That will not happen if there are jobless queues and the 32-inch flat-screen TV is repossessed.

This is why it would not surprise me if the terms of reference applied to the monetary policy committee were to be revised at some stage. With their specific remit to keep the flames of inflation as subdued as possible, the Bank of England lacks the flexibility to react as aggressively as have the Fed, which is also charged with keeping the economy on track. Last week saw a further cut in rates in the US, bringing the headline rate down to 2 per cent. Such a move is not in the gift of the Governor.

The market overall is lower than it was 10 years ago. There is no God-given right that means it has to recover but the vested interests in maintaining some form of steady growth are powerful today. Our pensions are increasingly linked to the value of the stockmarket and governments are finding it increasingly difficult to stand aside from what goes on in financial markets, even if our own central bank boss has a word or two to say about City bonuses. I don’t think I will be joining my chum in shorting this market.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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