However, most brokers believe it will go higher than that before the year-end, and the most bullish brokers are forecasting a strong follow-up to the surge that saw it touch 3,480 last week. No equity strategist predicts any kind of crash.
A short bout of profit-taking brought the Footsie down slightly by Friday, to close the year at 3,418. But, with a 28 per cent rise since January 1993, nothing could diminish celebrations of a bumper year.
Some brokers now believe the market is running ahead of itself. But almost all are optimistic that it will continue to be strong in the first few months of 1994, even if a growing tax burden slows the economy later. Most bullish is Roger Nightingale, who predicts a rise of more than 30 per cent in the Footsie to 4,500 by year-end.
Mr Nightingale forecasts GDP will grow by about 5 per cent for the year. With falling unemployment and low interest rates, 'the danger is of overheating, with inflation and the economy growing too rapidly,' he says.
He believes international competition and the impact of the recent Gatt agreement will help to maintain the pressure on pay settlements and thus squeeze inflation.
Nevertheless, he said: 'There will be plenty of money sloshing about and it will be attracted to London.'
Mr Nightingale's optimism is shared by Nick Knight, head of strategy at Nomura, who expects the Footsie to reach 4000 by the end of the first quarter, though it will be more volatile thereafter. Mr Knight points to low interest rates and expectations of a sharp rise in corporate earnings, dismissing the view of more cautious brokers that a prospective price earnings ratio of 15.4 - way above the historical average of 10.7 and close to the market ratio immediately before the October 1987 crash - suggests the market is overvalued. 'We are at the bottom of the earnings cycle, so you'd expect a high P/E ratio,' he says.
Also among the bulls is David Walton, senior UK economist at Goldman Sachs, who believes the year will see a full 1 per cent drop in interest rates. With inflation under control, he argues, 'there seems to be plenty of upside in the market.' Mr Walton predicts the index will close the year at 3,750.
Mr Walton's forecast is more optimistic than that of many brokers. Most believe the market may rise beyond 3,600, but the gains will be largely eroded by tax rises. Not one leading equity strategist is so bearish as to predict a drop in the Footsie.
The less optimistic believe the base rate will be cut by 1/2 per cent at most, a reduction the market has already anticipated. They also have a nervous eye on Wall Street. 'A big issue is US rates,' says Justine Roberts, of Warburg's international asset allocation team. 'The question is how far, and how fast, the Fed will raise them.'Reuse content