The City bookmaker Cantor Index yesterday made the FTSE 100 odds on to set an all-time record today by posting its 12th consecutive daily gain. Cantor's price of 4/6 is not exactly generous given the weight of history against it. But for much of yesterday afternoon, it looked as if the market would fall with the final fence in sight, only for it to stage a rally in the final few minutes of trading that allowed it to finish on 4586.13, up 9.52 points, thus equalling the current record of 11 consecutive days in the black. Such a feat has been accomplished only twice before and the index is now up 9 per cent since the current run started on 13 July.
The old City proverb says "sell in May, go away, buy again on Ledger Day". Those who followed this advice a couple of months ago (and some did) will be looking rather silly now, because the market's astonishing hot streak has continued despite what was seen as rotten news about the economy on Friday. Gross domestic product fell by 0.8 per cent in the second quarter, whereas City analysts had forecast a fall of just 0.3 per cent. Their confidence in the fabled "green shoots" taking hold appears to have been badly misplaced.
Of course, the FTSE is dominated by international companies, but the grim figures from what is still one of the world's major economies might have been expected to have some sort of impact. Not so. Investors clearly feel that the economic news in the future will be rather better. Do they know something we don't, or is this just another false dawn built on nothing more than hot air?
The case for the prosecution can be seen in trading volumes, which have been pitiful. During the current FTSE run, fewer than a billion shares changed hands on most days. To put that in context, in February and March volumes averaged well over 1.5 billion a day, and frequently broke through the 2 billion barrier.
It is not that there are no buyers out there, it is just that no one wants to sell. There may be a few more sellers if investors follow the advice of Morgan Stanley. The UK market has taken its lead from the US, where on Thursday the Dow Jones industrial average smashed through the 9,000 barrier, setting a record for the year. Morgan Stanley's strategists, however, do not believe the hype.
"We think the key drivers behind improving sentiment – upside to near-term growth estimates and continued positive (corporate) earnings momentum – may prove more transitory than the market believes," they say. "We remain in the tepid recovery camp. Cyclical growth risks have diminished but not disappeared. In addition, 2010 consensus earnings expectations already appear optimistic."
But there is a bull case too, and it is increasingly becoming the consensus. By contrast to Morgan Stanley, Citi notes that, for the first time since August 2007, analysts around the world are putting through more earnings upgrades than downgrades. "Financial conditions and economic expectations are also improving. It all suggests we could be approaching the end of the global earnings recession," the bank's strategists advise.
David Buik, marketing director of Cantor Index, says that, as is so often the case, it is news from the US that is driving the UK market higher. "We have seen a lot of results in the US that have been quite good. I think markets now really do believe we will see a recovery. It seems there is still a lot of money sloshing around out there and an increased appetite for risk," Mr Buik says. He still believes there will eventually be a corrective fall but he does not think it will erase all the market's recent gains. "There has to be a correction after this but a 5 per cent fall would be about right," he says.
Sector-wise, it has been recovery plays that have done the best, with basic materials (mining) at the top, fuelled by rising commodity prices. Suggestions from BHP Billiton that China was close to replenishing its commodity reserves barely caused a flutter to the sector's share prices. Positive results from Goldman Sachs in the US and Credit Suisse in Europe have raised hopes that Britain's bombed-out banks may be over the worst, which has lifted the financials, while hopes of increased economic activity and thus demand for energy have provided the oil and gas sector with a boost.
David Page, an economist at Investec, says the improved numbers from big US companies have made the market more comfortable that the worst of the downturn may be over, despite economic data generally still showing a rather mixed picture. "The third-quarter results in the US showed the expectations of analysts and the markets were too pessimistic. Longer term, the data does suggest a recovery but the catalyst for the rally was definitely the US," he says.
Chris Watling, of Longview Economics, also sees signs of things getting better, although he cautions against celebrating too quickly. "The market is perhaps a little ahead of itself but generally this is indicative of shares starting to price in a global economic recovery. You saw this sort of thing happening in 2003, 1975 and 1982," he explains. "Personally, I think the case for a recovery is strong. It might be a short global expansion – there could well be a second recession in two or three years' time – but you just have to look at the sectors that have been performing well. It's usually a two-phase process where in phase one you get the highest risk groups going up, while in phase two you see the more cyclical stocks coming into their own, like basic materials. I think we are probably on the boundary between the two."
Interestingly, the worst performing sector in each of the past two weeks has been the utilities, a part of the market that is traditionally seen as a place for investors to ride out troubled times because people have to spend money on water and electricity regardless of their overall economic situation.
So will the market manage the 12 days? The key company to watch remains BP. The oil giant issues its results today and they could be crucial, given the size of the company and its influence over the FTSE 100 as a result. The forecasts are not good compared to last year – the price of oil has fallen sharply since then and profits will certainly fall. But Mr Buik has an inkling that they may not be as bad as some people fear, hence the short price he offers on the record being set.
In the longer term, while there might not have been much to celebrate when Britain's economic data was released on Friday, perhaps the stock market is telling us that better times are indeed just around the corner and those fabled green shoots might finally be about to take hold.
Comments