Business Eye - August 2009
Summer in the stock market usually heralds a time of low volumes and subdued trading across the board, but the last couple of months have been anything but dull. In June we had already seen economic recovery anticipated in the market, with a strong rise in the FTSE 100 and since then it has continued on its upward path, effortlessly rising above its 1st January level. The market expects recovery, but it is sometimes difficult to gauge exactly where we are in the economic cycle.
There may be said to be three distinct phases to the economic cycle as follows: a contraction in financial services and construction, followed by a steep inventory and investment cycle and collapse in world trade and finally a consumer slowdown. There is ample evidence to suggest that we are seeing the first two phases bottoming out, both in the UK and on a more global basis. Traditionally the US is ahead of the UK in the economic cycle, which in turn is ahead of Europe.
In the US economic contraction slowed substantially in the second quarter after two dismal quarterly figures. As with previous quarters, the contraction was largely driven by cutbacks in investment and inventories. In contrast the UK revealed very disappointing figures, exhibiting few signs of recovery. The real surprise recently came from Europe, where the contraction was modest, but within that France and Germany both saw small rises, confounding most economic commentators. The Far East, including the much touted future engine for growth, China, has seen very mixed signals of late, although the economy continues on its upward path albeit at a more modest rate.
There is of course, no such thing as a “typical” recession, each one has its own unique characteristics and forecasters are rarely able to accurately predict the path it will take. Much speculation has accompanied this downturn at every stage; the heightened awareness spawned by the media has at times magnified the impact.
If we are in the third stage of the economic cycle, we are still facing a consumer slowdown; certainly common sense dictates that in the UK we have not yet seen all the effects of the steadily rising rate of unemployment. However, trying to be ahead of the cycle means that we have recently seen safe defensive stocks fall out of favour as investors turn to cyclicals in anticipation of economic recovery. The upturn has also been driven by the extremely high levels of liquidity and to some extent by a search for yield in the face of meagre interest rates.
Unfortunately the current crop of statistics only serves to muddy the waters and it will be some time before the picture clears.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of Cunningham Coates Stockbrokers.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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