Business Comment: The flaw in the bull market argument

Few things can be relied on in the stock market as much as the ability of newspapers falsely to call a stock market crash. When newspapers warn that markets are braced for further steep falls, they invariably fail to materialise. By the same token, however, when the City consensus is that the market is supported at current levels, it normally isn't.

After last Friday's sharp falls on both sides of the Atlantic, neither the weekend headlines nor yesterday's anti-climax should have come as any surprise. More worrying is the blithe insouciance with which equity strategists are writing off the prospect of a serious market correction.

Their case for doing so is little more than a variation on that old "things are different now" theme. The factors that normally kill a bull run are just not there this time round, the experts say. Inflation is a shadow of its former self, recession is a long way off and interest rates are close to peaking.

Perhaps as important, liquidity is strong, with institutions awash with cash that will eventually find its way back into the market. The bull market this year has also been very narrowly focused.

Strip out the banks, oils and pharmaceuticals and few other shares have done anything at all, which means there is still plenty of value among the second liners, especially those which have been under the cosh thanks to the strength of sterling.

The final plank in this sanguine (if not exactly bullish) argument is that the corporate sector is actually handing cash back to shareholders, unlike in 1987 when a flood of rights issues from stocks of such dubious quality as Maxwell Communications left institutions reeling.

To believe that rosy scenario, however, you have to go along with the view implicit in the short sterling market that interest rates will peak at somewhere between 7.25 and 7.5 per cent. That takes a lot on trust about the temporary nature of this summer's windfall consumer binge and turns a blind eye to the freefall in the unemployment figures.

Although we are experiencing what the Bank of England calls its "policy pause", it has been correctly pointed out that pauses tend to be breaks between movements in the same direction. Interest rates are on the way up and probably further than the market expects. That's hardly a recipe for a continuing bull market.

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