Outlook: Stock markets

CALLING THE bottom of a market is as difficult as spotting its peak. This column had the stock market, as tracked by the FTSE100 index, bottoming at 4,200. In fact, the low point came on 5 October at 4,648.7, which all goes to show, it never pays to be greedy. With the benefit of hindsight it is possible to see two events as establishing a convincing floor beneath Western share prices.

The first was the Federal Reserve's rescue of Long Term Capital Management. From the start, on 17 July, the bear market was more an internalised response to the financial contagion spreading from the developing world than anything else. In this respect it was quite unlike most previous corrections, which tend to be caused by a build up of inflationary pressures, an increase in interest rates, and a consequent reduction in credit and liquidity.

The collapse of LTCM threatened to turn this contagion into financial armageddon. Imagine what might have happened. The enforced liquidation of a $200bn portfolio would have moved the market dramatically further against the herd who had been following similar trading strategies. There would have been multiple bankruptcies and an undreamt of erosion of capital throughout the Western banking system.

Our own prediction of 4,200 for the index might have looked optimistic in the extreme.

The second piece of life support also came from the US Federal Reserve - a second cut in US interest rates. Although only a quarter point, the unscheduled nature of the cut nonetheless sent an important message to markets. Alan Greenspan and other policy makers were not entirely asleep at the wheel after all, but were still capable of decisive action.

Even so, the subsequent bounce in the market has taken even the most bullish commentators by surprise. The FTSE100 index has recovered more than half its fall and as things stand, it's up 6 per cent on the year as a whole. Recovery in the FTSE mid cap has been more cautious, while the small cap index remains way below both its peak and its starting level for the year. But, on average, even these companies have shown a considerable recovery since the market bottomed.

The bounce in the US has been more spectacular still, with the Standard & Poors composite now back to within spitting distance of its peak. As far as Western stock markets are concerned, then, it is almost as if the crisis of the late summer never happened. We all know that markets are prone to exaggeration, to bouts of panic both on the up and downside.

Despite the sophistication of modern analysis and trading systems, markets remain the creature of primeval psychologies - fear and greed. Traders move in herds, perhaps more so now that so many of them are not genuine investors than ever before, panicking the market down one month only to drive it up the next for fear of missing their turn.

This in itself is a good reason for remaining suspicious of the present recovery. Plainly we are now in much calmer waters than we have been. And it no longer appears likely that a big player in financial markets is about to go bust, causing a fresh bout of panic. On the other hand, the economic fundamentals don't seem to have changed very much.

The UK economy is slowing rapidly; the US and the rest of Europe cannot be too far behind.

As yesterday's regional trends survey shows, the recession in manufacturing is about to become official. A full recession across the whole economy still seems unlikely, but it would be unwise to bet that way. For investors, caution must remain the order of the day. That is not to say that all the bargains have gone, but the emphasis, as ever, has to be on stock selection for the long term.

Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
A scene from the video shows students mock rioting
newsSchool leaver's YouTube video features staging of a playground gun massacre
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
Arts and Entertainment
The cast of The Big Bang Theory in a still from the show
tvBig Bang Theory filming delayed by contract dispute over actors' pay
England celebrate a wicket for Moeen Ali
sportMoeen Ali stars with five wickets as Cook's men level India series
Morrissey pictured in 2013
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Robyn Lawley
ebookA unique anthology of reporting and analysis of a crucial period of history
i100  ... he was into holy war way before it was on trend
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmThe film is surprisingly witty, but could do with taking itself more seriously, says Geoffrey Macnab
Life and Style
food + drinkVegetarians enjoy food as much as anyone else, writes Susan Elkin
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end
UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

UCI Mountain Bike World Cup

Downhill all the way to the top for the Atherton siblings
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain