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Investment view

Can it really be that 2002 is nearing its end so quickly? Not that it has been a time of unalloyed joy. Frankly, many in the investment community will be happy to see the back of a year that undoubtedly qualifies for a place in the record books. Unless a miracle takes place over the next few days, we will have had the third down-year in a row.

Another record was established last week and, again, it was not one that will be delivering much in the way of comfort to investors. The first few trading days of December saw the FTSE 100 close lower on eight consecutive days for the first time since its inception in 1984. It is little wonder that an increasing number of investors are voting with their feet so far as the equity market is concerned.

This time last year, those charged with forecasting the likely direction of the market through 2002 were uniformly bullish. Apparently, the average guess for the level of the FTSE at the end of this year was 5,800. After bottoming at 4,434 on September 21, 2001, the index finished the year at 5,217 – a rise of 17.7 per cent – and many felt the bear market was over. By the time this summer arrived, we all knew it wasn&#39t.

What went so wrong in 2002? It certainly wasn&#39t the economy, even though we are ending the year looking rockier than we began. Fears are emerging that the UK manufacturing industry could slide back into recession, while the Chancellor&#39s autumn statement made clear just how little room for manoeuvre he has if he wishes to maintain his targeted level of spending. More important, the US economy is still failing to convince investors that a real recovery is on the way.

In these circumstances, you might have expected our market to outperform the US. Not so. The FTSE has been soggier than its US counterpart. Perhaps it is the predominance of financials in the leading benchmark that has produced this state of affairs.

It would be a brave forecaster who would stick their neck out and predict a strong recovery for 2003. My guess is that the pundits will be somewhat more restrained this time. Indeed, some consider that we may not make much, if any, progress during the year ahead. That really would be sad.

According to a mailing from Artemis last week, the London Business School has conducted a study into the statistical probability of a fourth bad year in equity markets. It suggests that, historically, markets have fallen for four consecutive years only 2 per cent of the time since 1900. Given that there are conveniently just 102 years covered by the survey, I assume it means this might have happened on two occasions. Of course, much depends on the reliability of the indices used, since the most frequently quoted benchmarks – the indices produced by the Financial Times – started in the 1930s and only really became properly representative in the 1960s.

The study suggests that, with three negative years behind us, the chance of a fourth down-year is just 38 per cent. Put another way, it means the market has a 62 per cent chance of standing still or rising. I cannot help remembering the old brainteaser about the odds of tossing a coin to turn up heads after six times of turning up tails. The odds remain unchanged at 50 per cent. However, since markets are expected to rise in the long term, a positive statistic seems sustainable.

Markets have a habit of catching people out. The present uncertainty suggests more bad news may be not far away. But, perversely, we could be enjoying more robust market conditions just when the situation looks at its worst. Few will have predicted this year&#39s market outcome accurately. Let us hope 2003 will favour the bulls once again. The thought that it might will cheer me through the festive season. Happy Christmas.

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