Faced with the choice between commenting in a vague fashion to take account of any delay between writing and publication, or sticking my neck out on what is happening in markets, I like to live dangerously. Are we about to achieve that much-needed upside breakout? The UK stockmarket has flirted with 4,200 before. Indeed, early last week, it nudged the magic number again, but was found wanting. Then, after girding its loins, it thrust through. So are we in a new, higher trading range or will we simply see a return of profit-taking? Indeed, has this already happened.
There is little doubt that confidence is strengthening around the investment community. Real optimists are predicting a rise of as much as another 10 per cent before the end of the year. That would turn 2003 into a very positive 12 months for investors, of the magnitude that we became used to in the 1980s and 1990s. Of course, this is after three years of disappointing performance for equity investors.
The last time I lived through a bear market on the scale of that we have experienced recently was at least mitigated in no small measure by the fact that UK shares went up by two and a half times during the year the new bull market started. There seems little chance of that happening on this occasion. By the end of 1974, valuation levels for British shares were at bargain basement levels. Today they are merely fair value. Fortunately, that is not the whole story.
Aside from continuing blue skies and warm weather, there are a number of other reasons for smiling faces in the Square Mile. Retail trading volumes are fighting their way back. Back in the days of the dot.com boom, retail share trades averaged 60,000 a day. By the beginning of this year, they were down to a mere 23,000 but have more than doubled subsequently. Execution-only and internet brokers are all reporting a resurgence of business and the re-emergence of an animal we thought had become extinct – the day trader. But today's market operator possesses more humility than was present when the new millennium started.
Last week was one of the more interesting in what is otherwise usually dismissed as the silly season. Here at home, inflation surprised economists by coming out well ahead of market expectations. Most had forecast a fall close to the Chancellor's target figure of 2.5 per cent. It actually rose. It seems that the sunny weather has led to less discounting of clothing and footwear on the High Street. Needless to say, money markets drew the conclusion that our monetary policy committee will put interest rates up but overall the inflation outlook remains benign and this rise is probably an aberration rather than an indication of a change in trend.
Unemployment fell again in July. As with inflation, this was not the expected result. Even so, the Bank of England has lowered its expectation for economic growth, citing the fact that the recovery in the world economy has been slow and uneven. US data also confirmed the widely held view that the economy there is improving, albeit slowly. Even the trade deficit narrowed, demonstrating how the weaker dollar was helping American exports.
Meanwhile, back home the sun continued to shine and I derived some pleasure from endeavouring to predict which companies would be benefiting from what promises to be a summer for the record books. With rumours of an imminent shortage in lager catching the attention of the tabloids, it was easy to point to brewers as being obvious candidates. Ice-cream makers must also be coining it this summer.
Unilever, Britain's premier ice-cream manufacturer, probably featured in the Isis analysis published last week showing the declining relevance of the FTSE 100 index when it comes to representing corporate Britain. Apparently, five of the 100 companies have 90 per cent of their sales abroad, while a further seven derive less than a fifth of their revenue from this country. This underlines the growing internationalisation of companies but it was not the main purpose of the report.
Isis aimed to demonstrate how poorly this index reflects where British economic wealth is created. It seems the financial sector in particular carries a weight in the index out of all proportion to its economic value. Just as well, then, that the Government has admitted that London's contribution to the British economy has been understated for years. And what is London's main industry? Finance.