American markets took heart from the decision to keep interest rates on hold and, more important, to moderate the language used in the accompanying statement to suggest the peak of the cycle had been reached.
This is not necessarily all good news, of course, as it suggests the Fed has growing concerns over the strength of the US economy. It was enough to send shares into overdrive, though, with knock-on gains in other markets as a consequence.
Back home, it was the publication of the minutes from the last monetary policy committee meeting that gave investors encouragement. One member actually voted for a cut in rates. A lone voice, perhaps, but it was enough for some to call the top of he interest rate cycle here as well.
The Budget itself was also something of a non-event – on reflection, that is. The headline cut of 2p in the basic rate of income tax certainly gave cause for considerable comment but the reality is that the effect was neutral overall, with the Chancellor taking away with one hand what he was giving with the other. What was of more interest was the cut in corporation tax. Even here, Brown’s sleight of hand was in evidence.
By reducing allowances for plant and machinery, the impact on the Treasury is minimal. The real winners are financial services companies and businesses which are not capital-intensive such as the pharmaceutical industry. These days, that is probably the bulk of FTSE 100 companies so the overall effect on earnings, and thus valuations, will be beneficial.
Perhaps this is the trigger needed to reinvigorate the large-cap companies. A year and more ago, investment managers to a man were predicting the end of the long period of outperformance by small and mid-cap businesses over their bigger competitors. They continued to pull ahead, though, demonstrating more an appetite for risk than any change in the fundamentals. Such is the consequence of excess liquidity.
We approach the end of the tax year with demand across virtually the entire investment universe outstripping supply but with fears of what might be around the corner moderating the value of the top end of the equity market. Or perhaps it is just that recent wild swings in share prices have served to remind investors that markets do not move in a straight line.
Overall, though, the picture does not look at all bad. Global growth may slow but a recession does not look likely. On the domestic front, our likely next Prime Minister is expecting a more robust performance from UK plc than had hitherto been projected and delivered a little shove to try to ensure that the Treasury forecasts remain as accurately optimistic as they have in the past.
But I remain just a little cautious and, while drawing comfort from the sturdy recovery of markets from the mid-Q2 bout of nerves, cannot help but try to see from where the trigger point that will signal the next downturn will emerge. Perhaps it won’t. After all, the 1980s and 1990s were one solid bull run – well, almost.
The real worry is that the development of derivatives and securitisation along with the increasing velocity of trading has made it virtually impossible to work out who the real victims of any asset price slump might be.
Worse, there is a growing fear that any downturn could result in an unprecedented linkage between the behaviour of different asset classes that appear to have little in common. If this does, indeed, prove to be the case, then it makes a nonsense of diversification. In the meantime, long live asset scarcity.
Brian Tora (firstname.lastname@example.org) is principal of The Tora Partnership