Most indicators point to a more joyful yearçs end for investors
There are still a lot of shopping days to go until Christmas and there are still global economic hurdles to be crossed between now and then, but most indicators point to a more joyful yearçs end for investors than any we have experienced since the dot.com bubble burst. Positive indications of a resumption of economic growth in both Britain and the US, accompanied by signs of returning investor confidence, suggest that the long-awaited turn around is happening and should be moving forward firmly by the fourth quarter.
Some among the more optimistic analysts suggest that by December 31 the Footsie 100 index of blue chip shares could claw its way back to the 5,000 mark and that the Dow Jones could reach a level somewhere around 10,500, but these expectations seem too rosy. While the bears have been vanquished in markets on both sides of the Atlantic, and share prices have begun to rise ú apart from the occasional glitches, which occur even in a strong market climate ú the recovery will be steady but slow. A year-end 4,500 Footsie and a Dow Jones slightly above the 10,000 èpsychological barrierî seem more likely.
In the UK and the US much will depend on two imponderable factors ú the impacts on their economies and on the markets of tax changes and interest rates. Both will also affect the worldçs Forex markets, and these (at least at the time of writing) appear to have developed a hyperactive will of their own, throwing traditional economic rules out of the window and adding another imponderable to the equation.
In Britain the 1% hike in National Insurance (which came into force in April and will net an extra £8 billion for Chancellors Gordon Brownçs Treasury coffers) has begun to slow the consumer-spending boom. For more than 18 months this High Street spree ú financed largely by dangerous levels of personal borrowing and encouraged by low interest rates ú has kept Britainçs economy afloat. And though industry, and particularly export manufacturing, is poised to take up the slack, as personal spending eases the switch will be slowŸ and will be reflected on the stock market. In the US a very different set of tax measures will come into play ú the huge injection of concessions and cuts introduced by the Bush administration as one of the opening salvoes in the Presidentçs campaign for re-election to the White House. These will put back billions of dollars into the economy; however, they will also take a while to filter through and for their effects to be felt.
And (as is the case in Britain, though to a lesser extent) the massive over-spend on capital investment during the boom years has meant that there is still over-capacity. So little, if any, of the cash released by the Bush tax measures is likely to go to capital investment ú which remains the best spur to real long-term economic growth.
It may be a case of short-term gain storing up future pain, as one leading Wall Street economist suggested recently, but Bush and his advisers are sanguine about the potential threat. US Treasury Secretary John Snow predicts 3% growth this year and an even stronger 4.75% economic blossoming in 2004. And his optimism was echoed, though more cautiously, by US Federal Reserve chairman Alan Greenspan in his six-monthly report to Congress in July.
Greenspan also indicated the Fedçs readiness to make further cuts in the cost of US borrowing ú at its current level of 1% it is already approaching historic lows ú should American growth falter and a further rate fillip be needed to keep the present momentum going. But will he or wonçt he decide to take such a step this year (by 2004 any further cuts should be unnecessary)? Içve long since given up attempting to second-guess Greenspan!
A question mark also hangs over Britainçs interest rates. The new Governor of the Bank of England, Mervyn King, brought with him to the post a reputation as a èhawkî and so took the markets by surprise in July when, chairing the Bankçs Monetary Policy Committee for the first time, he marched in step with seven of his eight fellow members and voted for a 0.25 rate cut. This took Britainçs base cost of borrowing to 3.25% ú its lowest level for almost half a century.
Though a cut before autumn had been expected ú and the stock market had already factored a future reduction into calculations ú hopes had been for a reduction of at least 0.5% and possibly more. Industry and many City analysts argue that if economic growth is to move into second gear and press forward another cut in August or September will be needed.
Certainly another cut seems on the cards. Inflation is being kept at bay and within comfortable range of the 2.5% demanded of the Bank by the Chancellor; the housing market has begun to ease ú though thereçs no risk of a slump; and sterlingçs weakness against the euro is benefiting British exporters. So there is room for a further reduction.
However, soon after taking over the Governorship King made it clear that the strength or weakness of the pound ú particularly against the euro and the US greenback - would be a significant factor in the Bankçs decisions on rates. And this, combined with apparent vagaries of Forex sentiment, clouds any reading of the economic crystal ball.
With American interest rates at 1% and those of Euroland finally and belatedly lowered to 2%, sterling ú even if rates are lowered to 3% ú looks the most attractive of the major currencies. Yet the euro, representing economies which are almost stagnant and have little prospects of equalling either Britain or America in the growth stakes, remains strong against both sterling and the dollar. Why?
Better minds than mine have failed to find an acceptable answer ú so I remain puzzled.
But at least I am confident that the markets are on the mend and that it is safe once again for the small investor to raise his or her head above the parapet.
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