Recovery surprises leave markets floating on air

David Smith 

Late August is a dangerous time to write about the stock market, ahead of the autumn storms. This time last year I might have remarked on the solid gains shares were showing during the holiday month, with the FTSE 100 up more than 300 points.Then banking armageddon arrived, pushing the index down nearly 2,000 points over the next couple of months. Not every autumn has a global financial meltdown and, fingers-crossed, history will not repeat itself. And we should not get too hung up about the seasons.

As Mark Twain memorably put it: “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

Economists are not necessarily best-qualified to tell you where the stock market is going. Nouriel Roubini, the New York University professor, has made his name in the credit crisis. A nice piece on Bloomberg last week, however, noted that if investors had followed his stock-market advice in recent months they would have missed out on the “rally of the century”, with the S&P 500 up 52% in six months, and the MSCI world index up 58%, the biggest gain since it started life in 1970. The FTSE 100’s rise is nearer to 40%, impressive but continuing its relative underperformance of recent years.

Roubini’s downbeat view of the American economy and the stock market may yet be right — but timing is everything.

Some fund managers, on the other hand, have what economists would regard as highly unusual views about the economy. Neil Woodford, head of investment at Invesco and one of Britain’s top fund managers, said: “I do not see economic recovery happening in the next three to four years”, and this informs his investment strategy.

That would imply the longest period of recession /stagnation in Britain’s modern history and, together with the downturn so far, would be twice as long as Britain’s slump in the 1930s. Nothing is impossible but, given that recovery has almost certainly already begun, this is highly unlikely.

The Bank of England’s latest forecasts, published this month, imply the UK economy will be more than 9% bigger in mid-2012 than now. I would have a small wager that its forecast will be closer to the outturn than no recovery at all.

Why have stock markets risen so strongly? It has been a two-stage process. The initial spurt from the dark days of early March came with a realisation that the world was not entering a second great depression (third if you count the end of the 19th century) and that not all banks would have to be nationalised. Markets were priced for disaster and decided this had been averted.

The second leg has been driven by good figures. “Economic data generally continue to be better than expected, which suggests that we are emerging from the longest and deepest recession \,” says Bob Doll, chief equity investment officer at Black Rock.

The figures suggest growth will have turned positive in every G7 country, including Britain, this quarter. France, Germany and Japan are already there. Germany’s Ifo measure of business confidence has soared, a reflection of the fact that export demand has turned the corner. China has led a turnround for the hard-hit Asian economies, acting as the region’s locomotive. America’s housing market, where the recession story began, is showing strength in both activity and prices.

Normally, economic recovery is tinged with a fear in the markets that the authorities will take action to dampen it down, notably with higher interest rates. However, central bankers made clear at their recent annual gathering at Jackson Hole, Wyoming, that this is not on their agenda. The markets have an unusually clear run.

In Britain, while figures last week showed a nasty 10.4% fall in second-quarter business investment, the credit crunch still biting hard on spending by firms, most of the figures have surprised on the upside.


1 Comment

  1. And during this time, more and more people switching to self -employment, there’s a
    broader acceptance of entrepreneurship and I really think is a good sign – just like these very young entrepreneurs in this business documentary below Produced by Louis Lautman.

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