Comment: Keep the festive cheer on ice for now

Traders work on the floor of the New York Stock Exchange. Picture: Getty
Traders work on the floor of the New York Stock Exchange. Picture: Getty
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The recent unseasonably warm weather has coincided with the stock market apparently trying to cool off. Since the start of December, the FTSE has fallen from 6,650 to 6,439 and is 5 per cent down from its high at the end of October.

So what’s going on?

The answer is that it is still a mixed bag. Yes, in broad terms things look to be getting better for UK plc and anecdotal evidence suggests an increased use of debit cards over credit cards to pay for regular purchases. So for some consumers at least, the money is in the bank.

The difficult call for investors in the UK stock market, though, is its international perspective. The success of the London Stock Exchange in attracting international business is that we are buying into other economies, not just our own – and here the message is much less clear.

The usual suspects have certainly crawled back out of the woodwork to give investors the shivers. Any thought that the United States might start to taper its programme of quantitative easing causes concern, and the real surprise last week was the budgetary agreement which included a degree of easing off in relation to the planned fiscal retrenchment.

The thought that the financial markets might have to stand on their own two feet, without the benefit of a following wind of QE caused the Dow Jones to give up all the gains of the past two months, stalling the stock market’s usual festive rally into the year end.

At the same time, hopes that European economies might start to show real signs of recovery are so far proving disappointing. Even Germany, mostly a stalwart within the eurozone, saw its trade surplus narrow in October. Its industrial output unexpectedly fell, albeit the outlook statement pointed to robust construction orders which should give cause for a more positive outcome over the coming weeks.

Ultimately, though, most observers have been regarding the stock market’s fall as no more than a healthy correction. It is always important to remember that the market values shares not on their past results but rather on what is expected of them in the future.

Analysts try to forecast the next two or three years’ profits for any of the companies in which we invest, to try and arrive at a basis on which to buy shares now. When we move into a recovery, the hope factor will always be the first to drive prices, and will only later be caught up by the real support that profits can bring.

So, where do we stand on that count?

Ultimately, the signs are that – economically speaking, and in very broad terms – things are getting better. The realisation is dawning that the rate of recovery has been overstated by the stock market, and a necessary correction is now under way.

Is this still the season to be jolly?

Maybe, but it may be a bit early to be getting out the festive woolly pullover. A little more cooling off, indoors and out, is probably in order first.

• Amanda Forsyth is investment manager at Murray Asset Management