Bulls trample the markets

Review of the year: As cash flooded into Wall Street and London, it seemed nothing could stop the great equity roll. Richard Phillips reports; Most major economies are in better shape, which has led to a surge in profits
As Traders polish off the last morsels of their Christmas dinner, they can look back with contentment on a year which saw the markets, and their bonuses, soar sky high.

Much of the impetus came from the mighty Dow Jones, which seemed unstoppable, even if, in the eyes of many pundits, it had started to detach itself from normal measures of value by the end of the year.

On Friday, the Dow Jones Industrial Average stood at a record 6560.91, a rise of 28.2 per cent.

Indeed, few forecasters came anywhere near calling the top of the market. In the UK, most had predicted a rise to 3,800 or so for the FTSE 100 index - which was far below its final resting point of 4091.0. The mismatch is partly accounted for by the extraordinary performance of the market in 1995, when the FTSE recorded a 20 per cent gain.

This year, the FTSE has added another 11.3 per cent, so continuing one of the most remarkable bull runs since the Second World War.

Many factors have helped to push markets higher. Most major economies are in better shape they have been for many years, which, by turn, has led to a surge in company profits. Under Clinton, the US has managed a sensible combination of policies, with record corporate profits helping push the market along.

Another major factor driving the Dow especially, but evident in other markets too, has been the dawning realisation that the digital age is now well and truly upon us. Microsoft, the software powerhouse led by bespectacled guru Bill Gates, almost doubled in value last year, to $102bn (pounds 60bn) by the year-end. Not bad for a company whose sales remain at less than $10bn.

The general rally in tech stocks in the US was mirrored in the UK by names such as Sema, the computer services company, and Sage, the accountancy software developer, who each managed to show good performances.

Yet cracks have appeared in the facade. Earlier this month, Federal Reserve chairman, Alan Greenspan, gave a warning about markets exhibiting what he dubs "irrational exuberance". It was enough to spark a sharpish fall on Wall Street, and, in London, shares saw pounds 20bn wiped off their values. Many thought Mr Greenspan's intervention would mark a much-needed pause, if not an end, to the soar-away bull market, his injection of reality being a welcome cold shower.

Not a bit of it: within a week, the declines had been shrugged off.

While the benign backdrop of stable inflation, low interest rates, and gently falling unemployment figures helped Wall Street and the City, the main force propelling shares to new highs was, in the end, simply weight of money.

The abundance of funds sloshing around international markets seeking the highest return was never greater. In the US, fuel was added by the continuing influx of money into mutual funds from private investors. A similar story took place over here; as employment appeared to improve, and inflation remained under control, disposable income started on a gentle upwards trend.

Some of the excess has obviously been seen on the high street, as consumer spending has picked up.

But much of the cash is being pushed into savings accounts, with new investment in unit trusts running at record levels, while Peps and investment trusts have also had good years.

Additionally, low interest rates have also compelled international investors to seek the best possible returns for their money. In these conditions, higher stock markets have a habit of becoming a self-fulfilling prophecy.

Japan, for example, now has the lowest bond yields ever, at below 1.5 per cent. The Bank of Japan recently urged its domestic investors to funnel their money overseas instead, and much of those funds have found their way into the usual safe haven of US treasuries.

But a goodly proportion of the savings has also been invested in stock markets around the world - hardly surprising when investors in the Nikkei suffered another atrocious year.

Despite hopes earlier in the year, which saw the Nikkeiclimb to above the 22,000 level, the market was the worst major performer - down 3.2 per cent by the year-end, at 19,369.04. That figure, however, masks falls of 10 per cent accumulated over the past three months: the market had once again recognised that the problems of the Japanese economy - such as the frightening overhang of bad debt on banks loan books, an aftermath of the "bubble economy" of the 1980s - remained deep-seated.

In Europe, many Continental bourses were eager to catch up, with France's CAC 40 index of leading stocks sporting a 23 per cent gain. Germany, still dogged by recessionary forces and the cost of reunification, saw the DAX 100 index up 20.4 per cent in 12 months. Italy's also surged, with the Comit Index showing an 11.6 per cent gain.