Investment: Don't panic! It's not all over

WHY ARE financial markets currently so jittery? What does it what mean for investors? Is this the start of something big and bad about to happen - even (whisper it not) another autumn crisis in the offing?

The questions are always the same every time the stock markets have a bad run and lose ground for more than a few days at a time. It is striking how it is only when markets are falling that these questions become so insistent. Nobody bothers to ring up or e-mail their worries when the markets have a good run for more than a few days in succession.

Just as striking is the seemingly inexhaustible search for a single explanation of what causes market setbacks. The finger in the stock markets last week was firmly pointed at a senior Microsoft executive who dared to venture the opinionthat valuations of technology stocks were "absurd". Reports of this opinion, it was said, accelerated another bout of selling of wonder Internet stocks on Wall Street.

Net stocks have been looking sickly for several weeks now, as the price of Freeserve in London demonstrates, but this, we were told, was "the straw that broke the camel's back", bringing the rest of the market down in its wake.

The whole idea is nonsense of course, just as it was the last time someone put the skids under the market with such an implausible one-shot explanation. It is as self-evident as anything can be that Internet stocks as a group are grossly overvalued. I know no genuine professional, inside or outside the City, who seriously thinks otherwise. Those who seek to justify them have had to invent new valuation methods to justify share prices that cannot be justified in any other way. That is a real issue. But just because somebody in the industry concerned happens to repeat what everyone in the business already knows, but chooses not to say, cannot itself be a reason for the markets to decline.

But the travails of the Internet stocks are only part of a broader and more complex story. The squeals of pain coming out of this particular segment of the market are mostly coming from the brokers and investment bankers who are trying to bring new Internet issues or funds to the market. They hope to cash in on the Net investment fad before it finally comes crashing to the ground, as it will in time, just as railroads and electronic stocks did in years gone by.

Only last week we saw the launch of a Net stock fund from the mighty Merrill Lynch, America's largest stockbroking firm, and there are lots of others either out or coming from fund managers in this country. As with most such spates of new issues, my advice is: ignore them like the plague. The chances are that you will be able to buy most of them more cheaply within a year or so.

For a long time, it puzzled me why market setbacks like last week's are so quickly elevated to the level of crises, at least in the media and the City's most talkative drinking holes. I am indebted to John Carrington, a splendidly robust fund manager of the old school, now retired, for the insight that the current level of the stock market is a marginal price - which, in the very short term, reflects only how well or how badly the most directly affected professionals are faring.

More often than not, when markets fall, those who squeal first are those who have been caught out investing on margin (i.e. with borrowed money). But it can also be when the promoters of new issues are caught with a lot of suddenly unfashionable property on their hands. What is more disturbing is how rapidly a contagion of gloom in the trading world seems to spread itself so quickly to many private investors, whose only source of information about the market is what they read in the papers, or see on the television, and who possibly believe that the market's movements can be explained in such a naive (and excitable) fashion. They are long-term investors with short-term anxiety thresholds.

Mostly, stories of the Microsoft executive kind are pretty harmless - unless you are one of those who allow suchchatter to get you too worried for your own good, with the result that you change your behaviour and do something stupid and panicky as a result.

There are plenty of genuinely good reasons to be worried about the stock market at the moment, but the crises that genuinely matter to investors do not, by and large, come out of a clear blue sky, but are the result of long-standing problems which in retrospect are obvious to everyone, but which at the time get lost in the excitement of more appealing but transitory phenomena.

My chart demonstrates one of the most obvious problems, which is the overvaluation of Wall Street, as measured by the so-called Greenspan valuation model - a simple model that the chairman of the Federal Reserve looks at when considering his next monetary move. It shows that the market has until recently been overvalued by as much as 40 per cent - more than in the run up to the 1987 crash. The model is calculated daily by Ed Yardeni, a prominent Wall Street economist.

At a macro-economic level, the big questions include what is going to happen to the dollar/yen exchange rate, and whether the recovery in Japan and other Far Eastern economies will be sustained. Differences between the Japanese government and the Bank of Japan over monetary policy were the biggest genuine concerns exercising professional investors last week. For the United States and the United Kingdom, interest rates are also a genuine concern.

For what it is worth, my view is that the markets are not yet ready to take a serious tumble of the kind that has long been predicted by the gloomier pundits, and that we will in due course see another decent rally. Against that, however, as I pointed out earlier this year, the global trend towards higher interest rates is not an encouraging backcloth for thinking that current valuations can survive indefinitely, and the technical charts for both markets are beginning to look very ragged.

My point, however, is that none of these concerns are particularly new. If you have not already taken some precautions as an investor against a return of Wall Street and (less so) the London market to more normal and sustainable levels at some point, then it is hard to see what will now persuade you to do so.

davisbiz@aol.com

PROMOTED VIDEO
News
Angelina Jolie with her father Jon Voight
people
News
Bill Kerr has died aged 92
people
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
Arts and Entertainment
Warner Bros released a mock-up of what the new Central Perk will look like
tv'Friends' cafe will be complete with Gunther and orange couch
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
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

SAS Business Analyst - Credit Risk - Retail Banking

£450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

Project Manager - Pensions

£32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

KYC Analyst, Birmingham - £200-£250 p/d

£200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

Test Manager - Banking - Yorkshire - £450 per day

£400 - £500 per day: Orgtel: Test Manager - Banking - West Yorkshire - £400-£5...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone