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
people Emma Watson addresses celebrity nude photo leak
News
Katie Hopkins appearing on 'This Morning' after she purposefully put on 4 stone.
peopleKatie Hopkins breaks down in tears over weight gain challenge
News
Boris Johnson may be manoeuvring to succeed David Cameron
i100
News
Band was due to resume touring this month
PROMOTED VIDEO
News
people'It can last and it's terrifying'
News
In this photo illustration a school student eats a hamburger as part of his lunch which was brought from a fast food shop near his school, on October 5, 2005 in London, England. The British government has announced plans to remove junk food from school lunches. From September 2006, food that is high in fat, sugar or salt will be banned from meals and removed from vending machines in schools across England. The move comes in response to a campaign by celebrity TV chef Jamie Oliver to improve school meals.
science
Arts and Entertainment
tv
Life and Style
fashionModel of the moment shoots for first time with catwalk veteran
Life and Style
fashionAngelina Jolie's wedding dressed revealed
News
i100
News
ebooksAn unforgettable anthology of contemporary reportage
Sport
Tom Cleverley
Loan move comes 17 hours after close of transfer window
Sport
Alexis Sanchez, Radamel Falcao, Diego Costa and Mario Balotelli
footballRadamel Falcao and Diego Costa head record £835m influx
News
i100
Arts and Entertainment
Madame Vastra and Jenny Flint kiss in Doctor Who episode 'Deep Breath'
tv
Extras
indybest 9 best steam generator irons
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

Executive Assistant/Events Coordinator - Old Street, London

£35000 - £38000 per annum + benefits: Ashdown Group: Executive Assistant/Event...

HR Generalist (standalone) - Tunbridge Wells - £32,000

£30000 - £32000 per annum: Ashdown Group: HR Generalist (standalone) - Tunbrid...

Derivatives Risk Commodities Business Analyst /Market Risk

£600 - £800 per day: Harrington Starr: Derivatives Risk Commodities Business A...

Power & Gas Business Analyst / Subject Matter Expert - Contract

£600 - £800 per day: Harrington Starr: Power & Gas Business Analyst/Subject Ma...

Day In a Page

'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering