Will 2008 see us teetering on the abyss?

Published on Friday 21 December 2007 20:49

THIS year has been a turning point for the UK stock market. Having enjoyed a very pleasant bull market since 2003, from an investor point of view something went awry at the beginning of the year.

This manifested itself as a general change in market behaviour that, on a day-to-day basis, signalled that something material had changed. For a market watcher, in addition to an increasing frequency of temporary market falls, many shares were not bouncing back like they had in previous bull years. Meanwhile, the strong rally in mining stocks covered up this general weakness in the broad market by pumping up the top-line FTSE 100 number to give it a gloss of normality.

It wasn't until the credit crunch kicked in during the summer that the forces creating this weakness became clear. Funds using bonds and stocks to turn their profit were being forced to sell stocks as their securitised debt/stock hedges began to go sour and be unwound. This silent beginning to the current bear market was the start of an avalanche that is engulfing not only the US and Europe but shortly the global economy: the credit crunch.

Most financial crashes and outrages are soon over and markets swiftly return to growth. This is because the scope of such events is quickly understood and discounted. This creates a quick correction followed by the resumption of normal market behaviour.

The scope, impact and consequences of the credit crunch are sadly not so easily measured and its effects not only have yet to be properly discounted but have also seeped out from their primary starting point – the US housing market – into the bloated world economy which has become utterly dependant on cheap credit.

This does not bode well for 2008 and, at best, the markets will remain fragile and volatile. The scale of the international credit market is vast, incredibly complicated and difficult to measure. While central banks, particularly the Fed and ECB, have moved to try and get the credit markets back on the rails, the potential for shocks that could hit the world's markets hard in 2008 is such that normal service is unlikely to resume. This will mean that, whatever happens, the markets will be operating under a pall of uncertainty that will drag on any rallies. This difficult environment is likely to stretch well into 2009.

As the year turns, the United States, European and global economies continue to teeter on the abyss of a financial disaster the likes of which we have not seen since the 70s.

To counterbalance this, it is clear that the European Central Bank and particularly the US Federal Reserve are fighting hard to halt the compounding toxic effects of a freeze in the credit markets. This gives hope that, while the potential of disaster is very present, a series of short-term measures may come to the rescue and save us from a deep recession. It's going to be a close call and 2008 will settle the medium-term fate of the UK's oncoming rough patch. People have forgotten how bad economic matters can become and with a little good fortune we won't be reminded in 2008.

&#149 Clem Chambers is chief executive officer of ADVFN, Europe's leading stocks and shares website. For free real-time share prices go to: www.advfn.com