October was best month in years for equities

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Stock markets on both sides of the Atlantic enjoyed a bumper month in October, posting their best gains for several years, it emerged last night as the closing bells rang.

In London the FTSE 100 index of blue-chip shares closed up 37 points to take its gains in October to 8.5 per cent, its best performance since September 1997. On Wall Street the Dow Jones industrial average was headed toward its best month in almost 16 years. It brushed aside the 29 October anniversary of the 1929 crash to climb 11 per cent, its largest monthly gain since January 1987 and its best October since at least 1915.

The mini-rally has removed an air of panic that pervaded the markets a month ago after a raft of poor economic and corporate news whacked stock prices in September.

But unlike previous rallies there was very little dramatic news that would justify such a strong recovery, which analysts said begged the question whether it was sustainable.

Nigel Richardson, senior strategist at AXA Investment Managers, said: "Stocks have fallen so dramatically that the debate now has to be whether there will be a change in direction."

He said the UK market in particular appeared to be at "fair value", based on analysis of price-earnings ratios. Mr Richardson was encouraged by the ability of the markets to "shrug off" bad economic news. "There is a certain symmetry about it," he said. "At the beginning of the year we had good news yet the markets continued to fall implying that stocks were over-valued.

"Now the flip side is that we get bad news yet the markets keep rising. This makes me feel we have seen the worst."

Yesterday the markets absorbed disappointing figures for US economic growth in the third quarter and very poor manufacturing growth in October. The economy grew 3.1 per cent in the three months to September, well ahead of the preceding quarter's 1.3 per cent but below forecasts of 3.6 per cent. Meanwhile an index of Midwest manufacturing slumped.

Julian Jessop, chief global markets economist at Standard Chartered, said the deterioration in economic data over the month simply boosted hopes that the Federal Reserve would cut interest rates. He said he believed there would be a rate cut next week unless today's data were strong but warned: "If the Fed doesn't act then we will be in for an ugly day."

But the optimism was not shared all round. David Schwarz, a stock market historian, said an analysis of previous booms and busts over the last century showed the market had to return to a trend rate before embarking on another upturn.

His calculations indicated that the Dow, currently at 8,400, needed to hit the mid-5,000s. "Prices could crash tomorrow, next week or next year – it's impossible to say," he said. "Or it could act like the [Japanese] Nikkei, which zigged and zagged down for a decade."

But he was more optimistic about the UK, saying the FTSE 100 had already hit its trend level of mid-3,000s. "I think the perspective for the UK won't be as bloody as the US," he said.

Other factors were also at play. Mr Richardson said the market had benefited from a seasonal end-of-year upturn. As Mr Jessop put it: "It is in everybody's interest for the market to end a bit higher."

Despite the euphoria surrounding October's rally, the levels of stock markets in the UK and US will bring little relief to investors. In the UK the closing value of the FTSE 100 at 4,039 still leaves it 42 per cent below the 1999 peak and 12 per cent below its level when Labour won power in May 1997.

For US investors President George Bush's first two years in office have been the worst on record since Nixon in the early 1970s in terms of the Dow.