Outlook: Close, but no cigar. For much of yesterday morning, the FTSE 100 flirted with its 2009 high, only for disappointing economic data from the US to prompt a modest sell-off.
It was a downbeat end to what was otherwise a strongly positive week, not only because the index failed to close above the 4,639 points it last achieved on 6 January, but also as the setbacks underlined just how fragile market confidence really is.
Indeed, the fact that investors chose to focus on below-par US consumer spending data, rather than the GDP numbers, which were actually better than expected, is in itself a good guide to how we might answer the obvious question about the market's bull run – its sustainability. The gains of the past 10 days (the past three months, in fact) have been based on improving sentiment rather than any tangible improvements in corporate earnings. Fair enough, naturally, to be more optimistic if you believe that better times for the global economy are just around the corner, but the trouble with sentiment-driven recoveries is they are hugely vulnerable to a dose of reality. Even the smallest bit of negative news has a disproportionate effect.
Stock market bulls have to hope that the V-shaped recovery that the British Government, in particular, is still forecasting does actually materialise. Markets anticipate economic events – conventional wisdom says six months before a recession ends is the moment to invest – but when that anticipation proves off-kilter, corrections can be sudden and sharp. Sadly, there is every reason to worry. The happiest conclusion we can draw from the data we have seen so far suggests that the recession is levelling off. There have been some green shoots, but there have been disappointments too. Certainly, there is no sign of the strong upswing for which the market is crossing its fingers.
Moreover, the window is closing. Markets have been rising for four months now, so two-thirds of that six-month lag time is up. If we don't begin to see data that is consistently more positive soon, investors will begin to question the judgements they've been making – and to reshape the equity market recovery into something more like the W or L that more gloomy analysts predict.
There's been plenty of talk recently about that familiar old stock market adage "sell in May and go away...", most of it about how investors who took its advice would have missed out. But remember we're only halfway through the period that the saying describes, with the second part of the adage, "...don't come back 'til St Leger's Day" advocating avoiding markets until mid-September.
The FTSE 100 was trading at about 4,200 in early May, about 10 per cent below today's levels. There's plenty of time for it to return to that level, and plenty of reasons to fear it might.