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Investment view

It does not seem to be getting any better. Last week saw some normality brought back to the market in so far as trading in the US started again. But it was an uncomfortable week. In the end, sellers overwhelmed buyers and although the retreat was surprisingly orderly, a retreat it was. There was no patriotic rally, as had been hoped. Nor are the economic signs giving investors any cause for encouragement.

Never has my email inbox been as full as it was last week. The whole of the investment world was anxious to put their marker down as to what they believed would happen. As you might expect, there was more than a degree of long-term optimism around. “Don&#39t panic” was writ large in much of the commentary that was distributed. There were times last week, though, when panic was pretty much how it felt.

What a week to be on the road delivering words of wisdom to IFAs and private investors alike. It is interesting to recount that investors themselves seem to be less disturbed by events than their advisers. Perhaps that is because the advisers themselves feel a degree of responsibility that makes them worry more over what will happen. And what will happen seems clearly to be that the US economy will move sharply into negative territory during the third quarter of the current year.

According to the US authorities, a recession is reached when GDP growth falls into negative territory for two successive quarters. We missed the economy shrinking by a whisker in the second quarter of the year. The US economy grew then by a paltry 0.2 per cent on an annualised basis. The shock of recent events will surely be enough to ensure that there is a minus figure when the statistics are announced in a month or two. The big question will then be whether there is time for recovery to be staged so that the fourth quarter does not confirm that the recession is in place. Anecdotal evidence suggests that this is highly unlikely to be the case. There is a general tendency among Americans to avoid crowded places at present. Unless further atrocities take place, this emotional response is likely to be short-lived but the effect it will have on the immediate state of the economy will be considerable.

We were already in a bear market before all this happened but now its extent will be exaggerated. Sadly, I find that there are few around today in the investment world who remember the bear market of 1973-74. This was kicked into action by a war, in this case, the Yom Kippur War when the Arab states tried unsuccessfully to crush Israel. The result was the quadrupling of the price of oil and, in this country, a blind disregard of the consequences, which lead to hyperinflation during the years that followed.

I am not suggesting that the situation this time around is anything like as dire as then. Inflation is relatively under control and the degree of economic sophistication these days should prevent the worst excesses from taking place. But this feels more like 1973-74 than it does 1987. Fortunately, we seem to be reaching oversold territory very quickly. This suggests to me that the bounce, when it comes, could be very swift indeed. But that is of little comfort to those trying to advise their clients on what to do in the very short term.

It is said that bear markets end when the last bull finally throws in the towel. With so much uncertainty around, it is impossible to say that this has yet happened. But, as I have said before, bear markets end on bad news, not good. The news has been universally bad. There may be more disasters set to take place – hopefully of a corporate nature rather than more human tragedy. But governments are already working hard to prime the pumps. Selling at this stage must be wrong.


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