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Investment View

So, now you know. It does exist. The “Greenspan Put” is there, able to ride in like the cavalry to rescue the market. It was not a figment of the imagination of a trader with a long bull position after all. We can all now relax. Or can we?

Last week&#39s action by the Federal Reserve Bank was only the second time that interest rates have been lowered between regular open market committee meetings – the people who set rates in the US – and the next one is not due until the end of January. On the previous occasion, we were in the middle of the Russian debt crisis, the implosion of Far Eastern markets and the collapse of Long Term Capital Management. The situation then looked dire. Indeed, the information to which the Federal Reserve Bank was privy on LTCM alone would have been enough to encourage executive action although whether an interest rate cut would have been sufficient by itself is debatable. With a full half-point cut last week, you cannot help but wonder what Mr Greenspan knows that the rest of us do not.

The truth is that much of the news coming out of Amer ica has been disturbingly downbeat. The purchasing managers&#39 index fell off a cliff, indicating that business confidence was seeping away very quickly, while manufacturing industry was claiming to be suffering its toughest period for 10 years. Add to that the raft of earnings&#39 downgrades and it is, perhaps, no wonder that Mr Greenspan was nervous. The real question is, what will it mean for markets?

The initial euphoria was short-lived. Markets always over-react in both directions, so you have to accept that part of the reason for the immediate 14 per cent surge in Nasdaq was correction to the previous day&#39s 7 per cent fall. Handing back part of that gain later in the week was also a natural reaction. In fact, the Fed&#39s action is something of a two-edged weapon. On the positive side, it should make the possibility of a soft landing – or at the very least a swift recovery from a hard landing – that much more likely. But it does not help confidence, suggesting as it does that the overall picture is worse than the one painted by official statistics.

Arguably, it is also not entirely healthy to know that the most powerful central bank in the world is standing behind the market as protector of last resort. This could lead to greater risk-taking. I have remarked on Mr Greenspan&#39s tendency to bail out markets in time of crisis – and it is true that much now rides upon the stability of financial assets so perhaps central banks cannot ignore what happens. But certain sectors of the stockmarket were ridiculously overvalued this time last year. Some shakeout was not merely likely,it was necessary and welcome.

Last year was not comfortable for those who supported equity markets. Only three ended in positive terr itory – Can ada, Switzerland and China. The home market was off by more than 10 per cent and Nasdaq finished the year 40 per cent down although the more broadly based S&P 500 performed more in line with our own index. Still, one should not ignore the fact that the US has been a good place to invest over the past five years. You would have nearly doubled your money if you had stuck with the Nasdaq while the S&P 500 has risen by only a little less.

For the future, we have to accept that the US, where the value of all the shares quoted are worth more than all the other stock exchanges in the world put together, should remain a core component of any internationally diversified portfolio. The 1990s were a great time for the biggest economy in the world. The future may be a less easy to predict but fortunes have been lost by ignoring America in portfolios. Nothing has changed so far as that is concerned.


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