- The Observer,
- Sunday October 20 2002
For most of last week, Reuters screens were flashing a very unusual colour. On a markets monitor, blue is the colour that represents rising share prices, and the FTSE's recovery over the past five days - with a rise of nearly 10 per cent - ended a long period when the screens were awash with red, it seemed, virtually every day. Since the internet-inflated peak of March 2000, share prices have headed south on a global scale, with world markets about 45 per cent down over that period.
But stockbrokers who went home happy with their week's work will be asking the most important question of all: is last week's rise the beginning of a sustained recovery, the beginning of a new bull market? Or, as on many occasions in the past, was it a flash in the pan, which would fade and leave investors in the grip of one of the biggest bear squeezes in history?
There were some genuine grounds for optimism. Good corporate results from such giants of American capitalism as Microsoft and Citigroup prompted a wave of buying in New York, and US enthusiasm quickly spilt over to London and, especially, previously bombed-out Frankfurt, which showed a 17 per cent rise.
The bulls jumped on the figures as evidence that the turning point had arrived. Abby Cohen, the Goldman Sachs equity analyst regarded as the doyenne of equity gurus, thinks the S&P 500 index will rise by 50 per cent over the next year.
David Schwarz, the stock market historian, was reported as saying that we were on the brink of a bull-market, but his view is less simplistic than that. 'I believe that the long-term trend is downward, and that may last a decade, but within that there are ebbs and flows, and there could be interesting situations where share prices rise for shorter periods. This could be one of those periods.'
Schwarz reels off the historical facts. 'Since 1940, there have been 56 occasions when the markets rose by more than 7 per cent over a five-day period, and when shares rose over a 20-day period, and in each of those years there has been a sustainable rise for a significant period afterwards.
'Obviously there is no such thing as a 100 per cent guarantee where stock markets are concerned, but if the historical evidence is any guide, we're probably near the start of a lengthy market advance, maybe for two years or so.'
Others disagree. David Buik, the market-aware executive of spread-betting firm Cantor Index, thinks there is more pain to come. 'It is a temporary rally in the middle of a vortex of despair. With low profit forecasts, the threat of war, and poor economic prospects, how can you say we're on the point of a bull market?
'There are worries too in the banking system. Markets have been sustained by borrowing, and the banks are getting cute - they ain't going to be lending any more.'
The bears are sticking to their guns. Stephen Roach, chief economist of US investment bank Morgan Stanley, was the first analyst to predict that the American economy could be vulnerable to 'double dip' recession and he thinks nothing has changed. 'Although the markets have experienced explosive moves in the past week, the data flow has remained generally on the weak side for the US and global economy... the confluence of financial market gyrations and heightened geopolitical angst does little to neutralise the uncertainty factor that remains an impediment to global recovery.'
At the sharp end, Keith Skeoch, chief investment officer of Standard Life, believes markets, on fundamental analysis, are ready for a re-rating. 'Clearly there are major risks ahead, most notably from any military action between the US and Iraq and its implications for the all-important oil price. But our house view is that corporate profits should rise over the next year or two.
'We also believe the world economy should avoid a double-dip recession and that economic recovery should slowly gather pace in 2003.'
The bulls appear to be growing in confidence, but there may still be a bear panic, or two, left.
