Hamish McRae: Are the markets getting ready for another midsummer fall?

In the first 10 days of August last year, the FTSE 100 fell more than 800 points


Could August be a wicked month – as it was last year? Here's the puzzle. At the moment, share prices appear reasonably solid. They are well down on the peak of the spring, but they have not collapsed. The FTSE 100 index is actually 100 points up on the year: on the last day of trading in 2011, it was 5572. The main US share indices are up, as are the German, French and Japanese. Hong Kong is up, though Shanghai is down a bit. The only really weak markets have been in southern Europe and for obvious reasons.

When you consider the wall of bad news investors have had to contend with in recent months, this is pretty remarkable. There is the near panic among the central bankers, the wave of austerity being imposed across southern Europe, the fiscal cliff in the US, the slowdown in China – woe upon woe being piled relentlessly on top of investors and yet, on the admittedly crude measure of share prices, they are adequately upbeat.

Yet, a year ago they were equally chipper, actually a bit more so. On 11 July 2011, the FTSE 100 was 5929; on 29 July, it was down a little at 5815. And then came August. In the first 10 days of the month, it fell more than 800 points to 5007. Similar crashes occurred on the other main markets around the world. Why the sudden change of mood?

I haven't found a good explanation. The pat one is that suddenly investors flipped from focusing on reward to focusing on risk, the so-called "risk on/risk off" transition. But that does not explain why the mood should flip. With hindsight, we can see there was a pause last summer in several main economies, but not significant enough to lead to a market crash. There was the eurozone's continuing agony, but what's new about that? Oil? China? Those were worries, yes, but nothing really to justify a shift of mood.

Now we are back to that uneasy calm of a year ago, the principal differences being that the markets are a bit lower and many of the worst fears of last summer have proved correct. Thus the eurozone's inability to cope with its problems has become more evident, not less, while US growth is slower. So what should we think?

My instinct is that this uncertain mood will persist for some while yet, perhaps a couple of years, maybe longer, until the developed world has come to terms with its overhang of debt. I was much stuck by a statistic I saw last week, which was that between 1999 and 2008 British householders withdrew equity from their homes every year to boost their consumption. Since 2008, they have been paying back debt, every single year. If you have a decade of spending more than your income, you take a while to get that debt back under control, but – and this is the good news – in another couple of years people could feel much more comfortable about the need to pay back debt.

You can extend this across different forms of borrowing, different countries, different borrowers. My point is that you don't need to restore debt to zero, or even the level of the late 1990s, and that goes for personal debt, company debt, national debt, the whole lot. You just need debt at a level that people on both sides feel is comfortable. For sovereign debt, all we probably need to restore confidence is for it to start falling, not rising.

Of course, it is possible some new shock in the coming weeks will lead to another wicked August for the markets. We can all think of candidates for the role. But it is just as likely that we keep slogging as before, a weary trudge up the debt mountain – and share markets will, in their lacklustre way, continue to reflect that. Not wicked; just dull.

The aircraft industry is still flying high

The Farnborough Air Show, open this week, is just another trade show, albeit of what is perhaps the world's most glamorous industry. But it can also give us a snapshot of what is happening in the world economy, for it has in the past been one of the most cyclical of all industries. So what is the message?

Well, not bad at all. The world is lucky to have two hugely competent commercial airframe makers, Boeing and Airbus, locked in fierce competition with some smaller ones snapping at their heels. And it is also lucky to have three great engine manufacturers, producing yet more efficient and reliable engines.

But the industry is lucky, too, for incremental technical advance has enabled it to go on increasing production through the recent economic downturn, with further increases forecast. As fuel has become more expensive, it is even more important for airlines to buy the newest models.

Add in the fact that the fastest-growing markets are in Asia, and you can see why this downturn is quite unlike those in the early 1990s and early 2000s, both of which saw aircraft production slump. So, for one industry, this has been the least damaging recession ever, in fact no recession at all – almost the mirror image of banking, in fact.


React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Associate Recrutiment Consultant

£18000 - £23000 per annum + Uncapped OTE: SThree: SThree Group have been well ...

Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE: SThree: Real Staffing Group is seeking Traine...

Year 6 Teacher (interventions)

£120 - £140 per day: Randstad Education Leeds: We have an exciting opportunity...

PMLD Teacher

Competitive: Randstad Education Manchester: SEN Teacher urgently required for ...

Day In a Page

Read Next
A couple calculates their costs with the help of some paperwork  

It’s the dream of escape that makes couples keep their finances secret from each other

John Walsh
Theresa May  

It's not hard to imagine Prime Minister Theresa May standing on the steps of Downing Street

Jane Merrick
Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
The magic of roundabouts

Lords of the rings

Just who are the Roundabout Appreciation Society?
Why do we like making lists?

Notes to self: Why do we like making lists?

Well it was good enough for Ancient Egyptians and Picasso...
Hong Kong protests: A good time to open a new restaurant?

A good time to open a new restaurant in Hong Kong?

As pro-democracy demonstrators hold firm, chef Rowley Leigh, who's in the city to open a new restaurant, says you couldn't hope to meet a nicer bunch
Paris Fashion Week: Karl Lagerfeld leads a feminist riot on 'Boulevard Chanel'

Paris Fashion Week

Lagerfeld leads a feminist riot on 'Boulevard Chanel'
Bruce Chatwin's Wales: One of the finest one-day walks in Britain

Simon Calder discovers Bruce Chatwin's Wales

One of the finest one-day walks you could hope for - in Britain
10 best children's nightwear

10 best children's nightwear

Make sure the kids stay cosy on cooler autumn nights in this selection of pjs, onesies and nighties
Manchester City vs Roma: Five things we learnt from City’s draw at the Etihad

Manchester City vs Roma

Five things we learnt from City’s Champions League draw at the Etihad
Martin Hardy: Mike Ashley must act now and end the Alan Pardew reign

Trouble on the Tyne

Ashley must act now and end Pardew's reign at Newcastle, says Martin Hardy
Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?