City & Business: Outlook foggy while shares ride the bear

THE AVERAGE bear market in the UK lasts 27 months and lops 22 per cent off share prices. This is what the chartists - number-crunchers who look at past patterns to forecast stock prices - will plonkingly tell you.

So, if this is a bear market, the bad news is that we're only four months into it. The Footsie, the index of Britain's biggest quoted companies, hit its all-time record of 3,520.3 in February. At this rate, UK share prices, which plunged past the 3,000 mark on Friday, will continue to slide for another two years, bottoming out in May 1996.

The good news is that shares have already fallen by almost 16 per cent from that peak. Therefore, the Footsie only has another 6 per cent or 221 points to fall before the average bear market decline has been reached.

So much for the comfortingly certain universe of the chartists. Back in the real world, the outlook is as clear as mud. The lurches in the stock market on Wednesday and Friday of last week unsettled all but the most determinedly sunny of share-watchers, even though they were triggered by respectively German interest-rate fears and alarmingly strong US growth figures.

If share prices solely reflected domestic corporate performance, the outlook would be fine. The recovery is gathering pace, albeit patchily. There's no evidence tax increases have dented demand on the high street. Profits are rising. And dividends are if anything outpacing expectations, though the Government's hints that it may clobber them at the next Budget has not helped sentiment.

But the stock market is largely linked to the gilts market, where prices have been plunging as fears grow about the prospects for interest rates here and overseas. The ghost of inflation is lurking over the horizon. The Government may soon start trying to spend its way out of electoral unpopularity. Commodity and oil prices are shooting up. Interest rates may also have to go up to defend the pound, which has been quietly sinking these past few months.

The simple laws of supply and demand will do nothing to support equity prices. Enormous quantities of new paper are still coming on to the market. True, would-be floaters such as TeleWest and General Cable have thought better of it, but that still leaves the likes of 3i and Eurotunnel (of which more anon).

On the demand side, institutions are full to the brim with equities, while the share of gilts in their portfolios is now less than 10 per cent - very low by historic standards.

Seasonal factors add to the gloom. As summer arrives, institutions go on holiday, buyers tend to fade away, but there are always sellers to depress prices, be they distressed Lloyd's names or executors liquidating people's estates.

All in all, it looks likely to be a rotten few months for the stock market, even if it does bounce a bit after last week's horrors. This particular bear phase may not last 27 months, but it's hard to see it ending before the autumn at the earliest.