The sign of seven, the year of the bear and other market superstitions; STOCK MARKET WEEK
Monday 23 December 1996
Footsie opened 1996 at 3,689.3 points, then a record. It closed at 4,077.6 on Friday and looks as though it will end what had been expected to be a rather sober 12 months at, or near, a peak.
The 250 mid cap index constituents have had a more subdued time but third liners seem to have performed strongly. The FT All-share index has risen more than 220 points to around 1,980.
Yet when the bells heralded the start of 1996 a pretty limp year was expected. Many observers believed we would witness an exciting first six months; they thought share prices would be fuelled by a continuation of the takeover stampede which had enlivened the last months of 1995.
But as the echoes of the epic Granada battle for control of the Forte catering and hotel empire faded the follow-up action was so thin it hardly stirred the dust.
Utilities were a noble exception. They have remained vulnerable, often falling into the arms of adventurous American groups.
The second half-year was seen as a rather edgy period as the stock market adjusted to the looming election and the prospect of Tony Blair at No 10.
In the event, the first few months were fairly lively but the real fun came in the autumn and in what is becoming the traditional festive share spree.
Many observers see next year's performance emerging as they had expected this year to develop; a strong start and then drift and decline.
Indeed, the arguments used to promote many of the 1996 forecasts are being regurgitated to support next year's crystal ball gazing.
Shares, they say, are not overvalued and the late rush of takeover action should continue into next year, helping progress.
Most believe the advent of a Labour government is already factored into share prices. But whichever party wins the election, they expect monetary policies to be tightened and shares to come under pressure. So, runs the conventional argument, Footsie will have a good run in the first months of the year but will close very near the level on which it ends 1996.
This year was regarded as relatively easy to call; yet many experts were wrong footed. Next year, with the election, is much more difficult to read; so, on past form, a year from now there are likely to be some red faces around the City.
A Labour government could tempt overseas investors to run for cover. And, if overseas investors start to sell, the market will be a sea of red and fund managers, like Tony Dye of PDFM, who are banking on a fall, will be spared the acute embarrassment of having completely misjudged the market.
"Red" Dye is, of course, betting on a serious correction, even a crash. He has increased his cash pile at the expense of his share portfolio. So PDFM has missed out on the share rise and its performance has consequently suffered.
The meltdown theory has strong support. If, of course, New York crashes, then shares around the world will slump. But it is difficult to see any justification for a crash on the scale of 1987.
London is often inclined to dismiss New York's strength and one of the developments which has mystified many is the yawning gap which has opened between Footsie and the rampant Dow Jones Average. But although London may be reluctant to follow Wall Street upwards it will unquestioningly reflect any decline and fall in sympathy with the world's biggest share market.
Interest rates could also be a drag on shares. They are expected to rise by up to two points next year. The strength of sterling is another inhibiting influence. Already analysts are pulling back profit forecasts of companies with extensive international exposures and there have been boardroom rumblings about profits being eroded.
The pounds 21bn which will be pumped into the economy from the building and insurance society conversions will also be an important factor. Halifax and others will generate heavy market activity - and that should be good for confidence.
The election (and its aftermath), interest rates and sterling, as well as the continuing economic improvement, are among the known large influences. But there are bound to be some surprise developments which cannot be factored into the equation. And they could destroy the results of the most careful research.
Forecasting will always be a difficult game. One stockbroker whom I often chat to believes Footsie could be around 4,800 when the forecasters are making their 1998 predictions.
When he put forward his view, in a City wine bar, he was subjected to a barrage of uproarious laughter. He may be far too optimistic. But I believe he is on the right track. By most yardsticks the market remains undervalued and I would expect it to make further progress during the year. If any Blair government can be sufficiently restrained to stop foreigners bailing out, sterling does not run amok (and that is unlikely under Labour) and the economy remains bright, then I expect blue chips and the rest to make headway.
In the unlikely event of a Tory election victory then my stockbroker chum could well be right.
On balance I would shoot for Footsie to close at around 4,500 points.
The market is often prepared to embrace superstition. And those who refuse to walk under ladders are making their own contribution to the debate. They are exceedingly cautious. Any year, they opine, which ends with a seven is bad for shares. They, of course, point to the 1987 crash as resounding proof. So the coming year is under the sign of the bear - beware.
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