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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Recruitment Genius: Experienced Financial Advisers and Paraplanners

Negotiable: Recruitment Genius: This extremely successful and well-established...

Guru Careers: FX Trader / Risk Manager

Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

Guru Careers: Investment Writer / Stock Picker

Competitive (Freelance) : Guru Careers: An Investment Writer / Stock Picker is...

Day In a Page

How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map
Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
Time to lay these myths about the Deep South to rest

Time to lay these myths about the Deep South to rest

'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

What exactly does 'one' mean?

Court of Appeal passes judgement on thorny mathematical issue