There are times when I wonder whether the best investment process is
really the dartboard or a collection of monkeys at keyboards selecting
stocks at random.
Despite all the years I have spent watching share prices and managing
money, I confess that sometimes it can be difficult to work out what drives
markets.
There we were last week, stunned by some, to say the least, worrying data
from the US when, admittedly after an initial sell-off, in rode the seventh
cavalry. Buyers were bottom-fishing again – as they have done on so many
occasions. Of course, by the time you read this, it could all be different.
We will have enjoyed a bank holiday over here. You cannot expect American
traders to take May Day, with its socialist implications, as a holiday away
from their screens. So we could be several percentage points adrift from
where we were at the end of last week.
But the fact remains that the market absorbed the news of accelerating
wage inflation, rising consumer spending and the continuing runaway growth
of the US economy with remarkable equanimity. They seem far more worried
about what will eventually happen to Microsoft.
Now, there is a story that will run and run. The shares took a heavy hit
on the back of results which were, to be totally fair to the company, not
at all bad. But it seems that in the perverse sort of conditions that
presently exist, any news was taken as a signal to bash the shares.
Certainly, Microsoft has not been getting too good a press lately. But at
least the Nasdaq is starting to rebound, showing there are people out there
who still believe technology is the only game in town. Investors over here
should be warned that a few early dotcom entrants over there are starting
to fold.
Unfortunately, the figures published in the US last week, particularly
those relating to GDP growth and wage rates, which rose far more than
analysts were anticipating, must make investors rethink the likely out-turn
of events as the year progresses.
We have already seen the European Central Bank put up interest rates and
many believe the Bank of England's monetary policy committee will follow
suit very shortly, though heaven knows why, of all the major economies, we
need an interest hike less than any.
The question is, what will Federal Reserve boss Alan Greenspan do about
the deteriorating situation on the other side of the Atlantic? The “i” word
is back in vogue. Inflation looks set to become an issue once more. People
are no longer talking about just another 25 basis points on interest rates
when the open markets committee meets on May 16. A full half percentage
point must be on the cards. Perhaps they will even raise interest rates to
7 per cent to try to slow the runaway US economy.
Of course, a stockmarket crash would probably do the Fed's work for it but
that is not really in anyone's interest. Nor is it clear that Alan
Greenspan considers an orderly setback in markets is achievable.
He has reacted before to prevent a share price rout and although he must
feel less inclined to step in under present conditions, who is to say at
what point he will feel enough is enough and that even a little bit of
inflation is preferable to middle America suddenly feeling desperately
poor?
Poor is certainly not what our Government feels at present – £22.5bn must
be beyond their wildest dreams. There could be casualties from this though
– and not so directly apparent as the shareholders of those companies
forced to pay through the nose to acquire the third generation of mobile
phone licences.
This money, which is quite likely to be paid up front, given the structure
of the deal, will remove any necessity for the Government to issue any more
long gilts. Annuity rates seem likely to remain under pressure, even if
short-term interest rates rise.
The raising of the age limit for compulsory purchased annuities will help
a little but we must be entering an era when the whole business of how you
should draw your pension is re-examined. Now, there is a chance for a
reforming Chancellor.
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