As bucket and spade duty takes a grip on the financial community and trading volumes wither, it seems a good moment to take stock of what has been an eventful year so far. Our own benchmark index – the FTSE 100 – started January at a little over 5,400, although the first day’s trading saw it touch 5,500. By mid-April, we were comfortably above 5,800 and all the talk was of 6,000 being regained. But that was before the BP disaster.
Quite how much the collapse in BP’s share price contributed to the fall in the index is not clear to me but by the beginning of July the Footsie was hovering around 4,800 – a fall of nearly 20 per cent. In the few short weeks since the market turned, helped in some measure by the comment from Fed governor, Ben Bernanke, that he really did not know what was going on, shares have rebounded by 12 per cent. One veteran investor I know remarked that when central bankers panic, it is time to start buying. He appears to be right.
The improving situation in the Gulf of Mexico has helped BP’s share price, which has contributed to the better tone in the market. Results from our high-street banks have added impetus. But soft commodity prices are back on the up again, led by wheat, the supply of which has been adversely affected by the Russian heatwave, while fears of a doubledip recession persist. There is still plenty to worry about.
I still take encouragement from the diverse range of opinions being expressed. Anticipated outcomes vary from those associated with Armageddon to the positively eulogistic. In the final analysis, we shall probably all experience something in between these two extremes. That central bankers continue to be nervous is clear in the Bank of England’s decision last week to keep interest rates on hold, despite inflation remaining stubbornly high.
Reading the vast swathes of economic and market commentary now available to us, courtesy of the internet, you realise there are those who believe deflation remains as a serious threat alongside others who consider we will inflate our way out of our debt problem. The one will be disastrous for equity investors. The other, unsettling initially, but likely to be good for financial assets overall.
I continue to believe that the ingenuity of man will ultimately find a way out of our current over-indebted predicament. Rolling back the state will prove painful – and the social unrest it might generate is not to be ignored – but in the end we should learn to live within our means and cope with the lifestyle and demographic pressures current in the developed world.
Among the gurus to whom I have turned in recent weeks has been Richard Russell, keeper of the Dow Theory. Richard was 86 last month, though he describes himself as a teenager locked in an old guy’s body. A World War Two veteran, he writes the Dow Theory Letters pages on a website that, remarkably, you should find top of the tree in a Google search, despite the fact that there are more Richard Russells around than you could poke a stick at.
The Dow Theory was, apparently, initiated by the first editor of the Wall Street Journal, Charles Dow. In his description of how it all started, Russell makes the point that the stockmarket is far more difficult today than ever before, mainly because so many analysts, professionals, money managers, arbitrageurs, speculators and serious individuals are involved and competing for profits. I can’t disagree with that.
Brian Tora is a consultant to investment managers, JM Finn & Co