The Scrooges are probably talking humbug again
Stock Market Week
Monday 20 December 1999
For the past decade or so it has been the same every year - the doomsayers pronounce that the UK market has finally reached the top and is due for a plunge over the following 12 months. And then, year after year, stocks have carried on rising regardless of gloomy spreadsheets and worried-looking analysts.
All the signs are that 2000 will be no different. My hunch is that, barring an international disaster, the FTSE 100 will have a bumpy ride but will manage to break through new highs and end the year at around 7,200.
The story so far. A year ago the markets were engulfed in a wave of bearishness and the Cassandras were out in force. A depressing mixture of international and domestic problems was casting a pall over global equity markets, and there was a feeling that the end of the world was, after all, nigh. With shaky emerging markets, dodgy hedge funds and the risk of a UK recession dominating the agenda, all the talk was of shock waves smiting the financial markets and collapsing economies.
Fast forward 12 months and the picture looks very, very different. The FTSE 100, which had finished 1998 at 5,882.6, is showing a gain of almost 14 per cent over the year and is mounting a valiant attempt to break through its 6,742.2 all-time high. The broadly-based All-Share is also in record territory, having risen by about 18 per cent over the year. Both indices went through a couple of serious wobbles during the summer and in October, but the underlying trend remained steadily upwards.
One of the main reasons for this resounding performance is that the Cassandras were wrong. There was no financial meltdown, the UK and the US economies did not tip into recession - thanks to the capable (or lucky) handling of interest rates by Messrs Greenspan and George - and the allegedly-doomed emerging markets barked, but did not bite.
The "micro" picture also supported this bullish "macro" background. For a start, the weight of money held by pension funds and private investors was thrown behind UK and global equities as bonds and other savings instruments yielded lower returns. And, in the latter part of the year, a bubble-like passion for Internet stocks and online trading sent hi-tech stocks rocketing.
Macro and micro issues will also be the major factors behind next year's performance. The big picture still looks encouraging, on both the domestic and global pictures. In the UK, the "Goldilocks" scenario of good growth and low inflation should continue into 2000. The economy will probably rise by a comfortable 2.75 to 3 per cent - enough to sustain profit rises in many UK plcs without triggering a big spike in inflation.
As usual, the Bank of England will be ready to hit the interest-rate brakes at the first sign of overheating, particularly in the labour and housing markets. The Bank's penchant for pre-emptive moves will probably trigger a couple of rate hikes in the first half of the new year. However, barring an enormous spike in GDP growth, rates should peak at about 6 per cent. The all-important US economy should follow a similar pattern, ensuring a smooth ride on Wall Street.
At a micro level, we can expect more of the same bullish scenario. Bonds - equities' big bogeyman - should be relatively subdued. With limited supply and very few inflationary threats, gilts yields are set to remain in the 5 to 6 per cent range. At those levels, equities will still offer better value than bonds, and investors will have little alternative but to keep piling into stocks.
The only problem with this benign picture is that not every punter will benefit all the time. All the signs are that the UK market is in for another volatile run and that investors will need to pick the rights stocks and the right time to make money. It was ever thus, of course.
Predicting the month-to-month vagaries of a stock market is a poisoned chalice, but there is a good chance that 2000 will turn out to be a game of four quarters. After an early spike fuelled by the start-of-year new money, share tips and the like, the FTSE 100 should run out of steam by late January or early February as investors lock in profits after the new millennium euphoria evaporates.
Two main factors should trigger a recovery in March and April. First, retail investors have a tendency to pile into ISAs just before the end of the financial year in April. And second, the disappearance of the millennium bug concerns will probably kick off a consolidation wave in sectors such as banks and telecoms.
Recent history suggests that the market could be hit by a correction in early autumn due to an international crisis or returning fears of inflation. However, the correction will probably be over by November, and the latter part of the year should see the customary pre-Christmas rally.
Of course, all these carefully-crafted predictions could be made to look very silly by some external shock, such as the 1997 Asian crisis, or simply by an irrational shift in investor sentiment.
As one fund manager put it, 1999 was such an unpredictable year that - depending on your stock picks and the timing of your investments - "you either did very well and you can retire a multimillionaire, or you ended up strumming a guitar on the street". It looks as if 2000 could be much the same. Book your Caribbean island holiday, but don't forget to take music lessons.
This week will be a good time to think about holidays and hobbies as the results schedule is very thin. The main event of the week will be tomorrow's interest-rate decision by the US Federal Reserve.
Most pundits expect rates to remain on hold at 5.5 per cent, with a rise pencilled in for early next year. However, a few pessimists, and some bond market players, are still fearful that Alan Greenspan and company could spring a most unseasonal and unwelcome Christmas surprise on the global financial community.
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