David Schwartz: UK's Stock Market Set For Down Year
The UK stock market rocketed ahead in 2005. Shares rose by 17pc, the third consecutive year of double digit gains. Optimists hope the painful downturn we endured from 2000-02 was temporary and the roaring bull market of the 1980s and 1990s has returned.
However, several long-running trends suggest it is late in the day for the current rally. If the past is any guide, the current strong performance of share prices on both sides of the Atlantic could be about to run out of steam and suffer a reversal.
There is the tendency for major bear markets, such as the 2000-02 downturn, to be followed by bounce-back rallies of limited duration. There were 19 very big downturns in the world's mature stock markets during the 20th century. They included Wall Street's mega-drop in the early-1930s, London in the mid-1970s, Tokyo in the 1990s and 14 other serious declines.
Economic and political conditions varied. A sudden economic slowdown caused shares on Wall Street to slip in 1929. A brief recovery ran out of road at the beginning of 1930.
Shares fell for two more years as investors took fright from banking system failures and trade wars with America's main trading partners. When the decline finally was arrested, the price of the average share had fallen by 86p.
Events could not have been more different in the mid-1970s when the UK stock market declined by 74pc. A slowing economy and double-digit inflation, what we now call stagflation, was the trigger. But rising oil prices and errors of judgment by the political leaders made investors' problems much worse.
The cause of each major downturn may have differed but the aftermath was similar. Recoveries were of limited duration. Thirteen bounce-backs ended within 19 months. Three longer-running exceptions to the rule ended at the 30-month mark. Our current bounce-back rally began in March 2003, 33 months ago. Wall Street began to rally in mid-October 2002, a bit ahead of London.
History signals it is very late in the day for both rallies, especially on Wall Street. No one knows when the US stock market will peak. But, if the past is any guide, the peak is overdue and will soon occur. Given US stock market and economic dominance, most observers agree London is unlikely to continue to rise if Wall Street begins to decline.
However, several long-running trends suggest it is late in the day for the current rally. If the past is any guide, the current strong performance of share prices on both sides of the Atlantic could be about to run out of steam and suffer a reversal.
There is the tendency for major bear markets, such as the 2000-02 downturn, to be followed by bounce-back rallies of limited duration. There were 19 very big downturns in the world's mature stock markets during the 20th century. They included Wall Street's mega-drop in the early-1930s, London in the mid-1970s, Tokyo in the 1990s and 14 other serious declines.
Economic and political conditions varied. A sudden economic slowdown caused shares on Wall Street to slip in 1929. A brief recovery ran out of road at the beginning of 1930.
Shares fell for two more years as investors took fright from banking system failures and trade wars with America's main trading partners. When the decline finally was arrested, the price of the average share had fallen by 86p.
Events could not have been more different in the mid-1970s when the UK stock market declined by 74pc. A slowing economy and double-digit inflation, what we now call stagflation, was the trigger. But rising oil prices and errors of judgment by the political leaders made investors' problems much worse.
The cause of each major downturn may have differed but the aftermath was similar. Recoveries were of limited duration. Thirteen bounce-backs ended within 19 months. Three longer-running exceptions to the rule ended at the 30-month mark. Our current bounce-back rally began in March 2003, 33 months ago. Wall Street began to rally in mid-October 2002, a bit ahead of London.
History signals it is very late in the day for both rallies, especially on Wall Street. No one knows when the US stock market will peak. But, if the past is any guide, the peak is overdue and will soon occur. Given US stock market and economic dominance, most observers agree London is unlikely to continue to rise if Wall Street begins to decline.