Last week delivered a positive cornucopia of news and information for those whose main pastime is taking the temperature of the market. Various house price surveys demonstrated that bricks and mortar remain a solid provider of profit for those who believe an Englishman's home truly to be his castle. Inflation data came in better than the market was anticipating, with falls in both the headline rate and the inflation rate less mortgage interest payments You might have thought the market would continue its upward move. Unfortunately, it stalled.
It is the 4,400 barrier that is causing the problem to the FTSE 100 index. A couple of times recently the market nudged towards it but profit-taking has brought it back again. The latest surge was predicated on better-than-expected results from Vodafone, one of the biggest companies in the index, but even its announcement that it is to return £2.5bn to shareholders through share buybacks was insufficient to help the market over this latest hurdle. What could move the market forward? More important, what is holding it back?
There was an opinion expressed last week that it was the threat of terror attacks to coincide with President Bush's visit to this country that was the real problem. Event risk is now something with which we have to live. It is hard to see, though, that long-term investors will treat this very real danger as anything other than a temporary interruption to a long-term trend. Investors react in an emotional way to these unfortunate events. In the end, it is recognising what is happening in the background that will determine the direction of the market.
Talking to a number of people with great experience in the investment world – and reading some recent articles for that matter – I am struck by the genuine division that exists between those who feel we are at the tail end of a rally in a bear market and the bulls who believe that a new golden age is just around the corner. Both can draw on sufficient supporting evidence to confuse the average investor. It all makes me wonder why there are not more people who, like me, consider that we sit somewhere in the middle.
Let us look at the reality of where we are. Markets became over-extended as the new millennium dawned. We have paid a heavy price for bringing valuation levels back towards sustainable levels. But after overshooting on the downside – which we all hope happened 14 to 18 months ago – the recovery has brought us back to fair value or a little more than fair value in the case of the US. This means that any future progress for shares is firmly predicated upon economic recovery and corporate profits' growth.
Thus far, signs are that both are being achieved. True, some issues support the bears, not least being the growing indebtedness that people are assuming. But this is a social shift as much as a financial one. We buy what we want these days and there are plenty of financial institutions to help provide us with the wherewithal. The interdependence of financial lenders with the consumer should, in theory, ensure that neither becomes overextended. Financial shocks in the past have demonstrated that you cannot rely on even the best informed to get it right but there is growing evidence that we learn from our mistakes.
Even so, the staggering speed with which economic power is travelling East must call into question the belief that this cycle will be just like any other. The power of the US is without question but the world is becoming a much smaller place. Relying on the home market is no longer a safe option. Choosing where else to invest is not easy, though. Investment is no longer the cottage industry it once was. This brings new challenges but it is not all good news.
As I lunched with a former colleague last week, he remarked that a leading fund manager had confessed that he was tired of this game. In the past, seeking out that company along a dirt track 200 miles north of Stockholm, investing and then making money was fun. Today, you meet other investors returning down the same track.
Portfolio management has changed but the overall signs are positive and the news coming out is good. The market may be well up with events but there seems no reason to believe that we will return to the dark days of a year ago. It is just more crowded in the market these days.