Derek Pain: The stock market is not in the clear yet

No Pain, No Gain

The stock market is an intriguing creation. If it always ran true to form almost every investor in sight would be a winner. But it has a nasty habit of wrong-footing even its multitude of alleged experts.

This year its unpredictability soared to new heights. Who would have thought, as the penultimate month of 2009 looms, that shares would have staged such a remarkable recovery and hopes would abound that further progress is on the cards.

At the start of this year, deep gloom prevailed. Bulls were conspicuous by their absence. Somewhat tongue in cheek I suggested Footsie could end this year at around 5,300 points. My forecasting record is appalling and, quite simply, my endeavour to inject a little cheer into a nightmarish atmosphere was more emotional than practical. Still, it is nice to be on the right track for once even if my shot in the dark was not entirely based on any conviction.

In March, Footsie fell below 3,500. So whatever the final two months produce it has enjoyed a storming run. Even this week's sell-off has failed to dampen the widespread enthusiasm.

I suppose, as far as investors are concerned, the recession came to an end in March. Yet Britain is still deep in the doldrums experiencing the longest downturn on record.

So there is a stark contradiction. Shares recover, admittedly from a collapse of mammoth proportions, yet the nation's economy continues to decline. I know the stock market has a reputation for anticipating events but there must be a danger that it has moved ahead of the game, even if the latest economic figures benefit from favourable revisions.

But such a possibility is being largely ignored. There is even speculation that shares will once again enjoy their traditional Christmas and New Year upsurge. I don't want to be the killjoy at the party, but I do feel people are getting carried away and a more cautious approach is needed.

After all, a long, hard slog lies ahead. Taxes will have to be increased and there seems little doubt that unemployment will next year top three million. The winner of next year's election faces an awesome task. And continuing interference by the Brussels eurocrats is going to make the battle to get back onto an even keel even more difficult.

I am inclined to agree with this week's comments by Dr Stephen Barber, the pundit who advises stockbroker Selftrade. He points out that the stock market "does not appear to be unduly concerned" by the contraction in Britain's economy.

But he warns: "The fact is that while we have seen economic revival in the world economy, danger remains at home and abroad. In Britain, we have not enjoyed recovery and when it comes it could be very weak indeed. Investors should adjust their portfolio strategies accordingly."

The stock market downturn lasted some 500 days. Much shorter, then, than the crash in the 1970s, which went on for 608. Although each share disaster is created by different influences there was, I believe, many similarities between the two catastrophes.

Of course, when stock markets are in the dumps, takeover activity and cash calls grind to a halt. The recovery has seen a modest sprinkling of bid activity, but the current assault on confectionery group Cadbury from across the Atlantic represents the only mega-action in sight.

On the money-raising front, there has been much more activity. In fact, it could be argued that shares have progressed despite a deluge of cash- sapping rights issues and placings.

It is likely that the demand for new money will continue. Companies need cash to ease the debts that were built up during the boom days. Many businesses even created debt piles just to hand money to shareholders. In addition cost-cutting and restructuring, although reducing overheads, are expensive in the short term. And interest rates will eventually increase: the wise executive is preparing for such a happening.

Although the bull run caught many experts on the hop, there is a strong feeling among the punditry that, allowing for the odd hiccup, it will continue for some time. I hope the optimists are right. I am not a bear, but I believe many expectations are too high. It would, however, be nice to be wrong this time.