The good news that shook investors

News Analysis: The stock market has staged a dramatic recovery. But is there more trouble ahead?

THIS IS, it seems, fast becoming the crash that never was. A month ago, with the FTSE 100 down more than 25 per cent from its 20 July peak of 6,179 and New York's Dow Jones falling like a stone, the talk on the dealing floors was of 1929, market meltdown and worldwide economic depression.

Now, with the Dow hovering around 9,000 again and the FTSE having regained nearly four-fifths of its losses from the trough of 4,648.7 on 5 October, it all seems like a bad dream.

"Suddenly, the skies have cleared," says Omar Sheikh, head of research at brokers Charles Stanley. "Fears of global recession, bank failures and distressed sales by hedge funds have been allayed by concerted action by the Group of Seven to reduce interest rates. Investors have been switching funds of bonds into equities, and the powerful rally in world stock markets this has caused has left the bears running for cover."

Investors dropped the banking sector like a hot brick as, one after the other, shocks ranging from the Russian bond crisis to the near-collapse of Long-Term Capital Management, the hedge fund, hit home. But the sector has rebounded as quickly as it fell.

Meanwhile the "safe haven" sectors such as utilities and retailing, which saw some share prices rise in September when all about them were falling, have performed abysmally since.

At the same time, 10-year gilts yields have fallen back to 4.5 per cent from a peak of 5 per cent as the panic flight to these supposedly recession- proof instruments has been dramatically reversed. Even sectors such as engineering and chemicals, which had been underperforming all year, are up sharply on the month.

Trevor Greetham, UK market strategist at Merrill Lynch, the US investment bank, says: "There has been a ferocious unwinding of safe-haven bets. All the sectors that are outperforming now are the sectors that were underperforming in September. We really are back where we started."

This phenomenon can be seen at its most graphic from a look at the behaviour of individual stocks. Barclays, the FTSE's second-worst faller, plunged 54.8 per cent to a low of 867p on 5 October. Since then it has seen its share price jump 42.45 per cent to 1,235p. Money manager Amvescap, the worst performer, tumbled 62.3 per cent from peak to trough. Having bottomed out at 263p, it has since rebounded by 73 per cent to 476p.

Beneficiaries from the flight from risk, such as electricity producer PowerGen whose shares rose by 5.5 per cent to 886.5p in September, have reversed thrust just as smartly. PowerGen's stock fell by 5.8 per cent in October to trade at 835p, 5p off where it was in July. Rival National Power rose by nearly 2 per cent in September, but since the market recovery began it has slipped by 5.4 per cent to 536.5p.

The rebound is, of course, no more a purely British phenomenon than the collapse that preceded it. Germany and France, the two largest continental European markets, have bounced back by 23 per cent. On Wall Street, the Dow is up by 15 per cent from its lows.

Similarly, in other markets it has been banks and cyclical stocks such as automotive and engineering companies that fell fastest in the collapse and have recovered most sharply in the rally of recent weeks.

The big difference between Wall Street and the European markets is that, whereas the Dow began falling in July, hit bottom on 31 August and has since rallied close to its peak, Europe - including the UK - bottomed on 5 October. There has been a steady rise since, but there is little bit further to go.

Surprisingly, however, the relief has been far from universal. Spare a thought for the UK pension fund manager who, in October when shares were rebounding strongly, was holding 7 per cent cash. The five-year average levels are 4.5 per cent. Now, according to yesterday's Merrill/Gallup survey, UK pension-fund managers are itching to plunge back in to the market - just when the big broking houses are telling investors that this rally may not last.

Mr Greetham at Merrill Lynch thinks the rebound has been much too speedy for comfort, and that there may be more trouble ahead.

He points out that globally equities have bounced back by around 18 per cent in the past month, the fastest rise in any month since February 1991 when the Gulf War ended with the rout of Saddam Hussein's troops and the oil price, which had rocketed during the conflict, went into free fall.

This time there is no similar positive factor at work for the economy at large. True, the fears of a major banking failure and a global credit crunch have receded, but the threat of worldwide recession to which the investment world suddenly awoke in September has not eased entirely.

The US Federal Reserve, warns Mr Greetham, may cut interest rates to save the world from wholesale collapse, but it is not going to cut again just to keep an irrational share boom aloft. "People are saying that the Fed cuts have given enough of a shove to be able to see across the short- term ravine of earnings slumps to the recovery on the other side. Personally, I still think the world economy is going to slow sharply. At these levels the market is overbought."

Richard Davison, European strategist at Morgan Stanley Dean Witter, is also far from convinced that the current market rally is built to last. In 1987 the market went through six months of stabilisation, during which shares zigzagged nervously before resuming their rise. Eleven years on, the economic backdrop is much bleaker and profits forecasts still have a long way to come down.

Mr Davison warns that December, normally one of the stock market's better months, could be painful. "There is still fear about the economic future no matter how much easing there is. Growth is going to be sluggish next year. The UK economy will be weaker than many competitors, and that means weaker profits growth and a weaker stock market."

News
Jeremy Paxman has admitted he is a 'one-nation Tory' and complained that Newsnight is made by idealistic '13-year-olds' who foolishly think they can 'change the world'.
peopleThe idea has been greeted enthusiastically by the party's MPs
News
Michael Buerk in the I'm A Celebrity jungle 2014
people
Voices
File: David Cameron offers a toast during a State Dinner in his honour March 14, 2012
voicesAnd nobody from Ukip said babies born to migrants should be classed as migrants, says Nigel Farage
Arts and Entertainment
Avatar grossed $2.8bn at the box office after its release in 2009
filmJames Cameron is excited
PROMOTED VIDEO
Arts and Entertainment
Stik on the crane as he completed the mural
art
News
Happy in his hat: Pharrell Williams
people
Arts and Entertainment
Stella Gibson is getting closer to catching her killer
tvReview: It's gripping edge-of-the-seat drama, so a curveball can be forgiven at such a late stage
News
Brazilian football legend Pele pictured in 2011
peopleFans had feared the worst when it was announced the Brazil legand was in a 'special care' unit
News
i100(More than you think)
Sport
Brendan Rodgers seems more stressed than ever before as Liverpool manager
FOOTBALLI like Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
News
ebooksNow available in paperback
News
The Magna Carta
archaeologyContemporary account of historic signing discovered
News
Phyllis Dorothy James on stage during a reading of her book 'Death Comes to Pemberley' last year
peopleJohn Walsh pays tribute to PD James, who died today
Sport
Benjamin Stambouli celebrates his goal for Tottenham last night
FOOTBALL
Life and Style
Dishing it out: the head chef in ‘Ratatouille’
food + drinkShould UK restaurants follow suit?
News
peopleExclusive: Maryum and Hana Ali share their stories of the family man behind the boxing gloves
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

Argyll Scott International: Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Argyll Scott International: 2x Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Recruitment Genius: Senior Execution Trader

£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

Citifocus Ltd: ACA - Financial Reporting

£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game