Break out the champagne, blow the trumpets, bang the brasses. Interest
rates are cut once more. Happy days are here again. Well, at least they
were last week. A comprehensive bounce in the domestic index restored
verisimilitude to an otherwise bald and unconvincing narrative. Enough of
the G&S allegories. Has the bear market come to an end? Possibly – that is
about as far as I am prepared to go at this stage.
Never underestimate technical influences. Our chief portfolio strategist, Mike Lenhoff, maintains a chart that is so big we do not have a wall wide enough to
display it in full.
It is the “overbought/oversold” indicator much loved of portfolio
strategists. He assures me it is, if not infallible, one of the best guides
to short-term market moves around although I have thus far failed to
back-test it. But he did say that the UK market was looking seriously
oversold two weeks ago. The UK market has since bounced. The good news is
that he still believes domestic shares remain in oversold territory. On one
matter I will agree with him wholeheartedly – it is not just fundamentals
that move markets. Technical influences, institutional cashflow, pure
sentiment all combine to determine the way in which our wealth wilts or
rockets. The fundamentals, it has to be said, have not been that bad.
True, the nation's purchasing managers are a tad cautious – not as
pessimistic as those in the US but none too confident that the UK will
shrug off an American-led slowdown. But companies are delivering profits
that look, with a few notable exceptions, no worse than we were
Indeed, there is just the inciest bit of summer cheer around at present.
Lombard Street Research, well known for preaching doom and gloom, regales
me with the belief that we look to be heading for above-trend growth in
2002. It seems there is nothing new under the sun. Gordon Brown failed to
eliminate boom/bust cycles. Hopefully, we may be close to ending our
anticipation of the bottom of the bust part. This is clearly not what the
Bank of England's monetary policy committee believes. The fact that it has
cut interest rates during the same week that the Nationwide Building
Society remarked upon unsustainable house price inflation must be an
indication that it is more worried about slowing global economic activity
than it is over the cost of the average home.
As it happens, the fall in interest rates has had a marked effect on the
affordability of housing in this country. The cost of buying a house now on
average absorbs less of our income than was the case in the 1970s, even
though the likely cost will be a higher multiple of salary than we had to
bear then. But house prices can fall, as we discovered so painfully in the
early 1990s. Then there were heavy technical influences that drove prices
up – and just as swiftly down.
So, we have to decide whether this latest rally – which admittedly has
taken place on the back of very low trading values – is a further stage in
the consolidation of the stockmarket as we approach the end of the bear
market or simply a technical bounce before we resume a downward trend. I do
not wish to prejudge the verdict of my colleagues on the asset allocation
committee but I am encouraged that the news flow is generally supportive of
current market levels while there is a growing body of opinion that
suggests the global economy will pick up to trend growth or even a little
better during 2002.
That is sufficiently close to take comfort, given that markets anticipate
events. It would not surprise me in the least if we were enjoying more
robust stockmarket conditions just when companies are reporting reduced
profits. It has happened before and in the world of investment there is
seldom much that is truly new.