In the City
The bull market
Tony Rudd
What was so extraordinary about the stock market just before Easter was not simply that it went into new high ground (something which had been on the cards for several weeks) but the way in which it did it. This was no case of the market pushing gently at the previous peak level; instead, it went through the barrier like an express train. Furthermore it did so when a fair proportion of those who would normally have been busy assisting at this joyous task were stuck in their cars half way through Thursday afternoon trying to make an early getaway down one of the motorways to some country seat or other. Many a broker suffered the indignity of hearing the news on the radio. This was the culmination of a series of days when the rise in the market, measured by the old fashioned Financial Times Thirty-Share Index (which actuaries disapprove of but which the public still follows), had been in ten-point leaps.
The consensus of opinion now is that the public, meaning private investors as distinct from the institutional fund managers, are responsible for the new buying. But as the volume of trading hasn't been particularly large this could only have had the phenomenal effect on prices which it has, given the clear unwillingness of the professionals to provide these eager individual buyers with the stock they want. On top of this the jobbing system appears to be relatively short of stock. Will the process go on? It will until either the public loses its appetite or the professionals decide to sell into the strength, or both.
The initiative, it would seem, is with the private investor. If he goes on buying, the professionals are unlikely to sell him stock in sufficiently substantial quantities to satisfy demand without further price rises. In saying this, one is putting one's head on the block because so many times in the past exactly the opposite has happened. The private investor has appeared to have the initiative only for it to be found that in fact the institutions have been selling quite heavily. After all, it is part of their object in life to beat the market and this can only be done by getting it right at the expense of somebody else getting it wrong. But in this particular case now institutions must be fairly wary. For the economic news is behind the market. There is the promise of better things to come. Each day the newspapers carry further pieces of news along these lines. Indeed the atmosphere of expectation has changed completely compared with, say, only four weeks ago. Some observers have rather skittishly suggested that it was the protest of the 364 economists that rang the bell. It is too much to suggest any causal relationship here but turning points in business cycles (and indeed in political ones for that matter) quite often coincide with some grave utterance by an individual or a group the underlying import of which is immediately contradicted by outside events. However, suffice it to say that whereas the outlook was nothing but gloom, now investors can see nothing but improvement.
There may, of course, be disappointment in train for both the economy and investors alike, but we shan't know for some months, perhaps even a year, whether the present mood of euphoria is overdoing and overdiscounting what is to come or not. That is why people in the market always say that it is better to travel than to arrive. It is better to hold a goldmining share while they are still digging for the gold, or an oil-drilling prospect while they are still looking for the oil than during the much more tricky period when they have found either the gold or the oil and are sending out the exact figures of what is involved (particularly in future expenses), over which the analysts can pore. Better by far to live in hope that the coming recovery is going to deliver an increase in profitability of thirty or forty per cent than to sit through the period when the actual figures are coming through every day and can be counted. Then it may well be right to have bidden farewell to the thirtyshare index.
So in these circumstances, and at this early stage, there may well be a continuing reluctance on the part of the professionals to go against the mood of the market, which indeed is buoyant. But then there is another category of participant in the market who could pour cold water on the soufflé. That is the companies themselves. There must be many a corporate treasurer amazed at how his company's share has performed who has spent the Easter holidays calculating exactly what proceeds might be delivered by way of a one-for-two rights issue. No money is so cheap as that raised by a fresh equity issue. Nothing will be so sweet as to go down to the bank, thank them for their support in the past and tell them that the current overdraft will shortly be funded from a really cheap source. Eventually there must be a flood of rights issues from companies whose balance sheets have been put through the financial equivalent of the Scarsdale Diet and which desperately need replenishing. But this is also a matter of timing. A company can't go to the market with filthy figures and expect to get a good reception from its shareholders. For most of the companies that need the money 1980 will have been a dreadful year. There will be a tendency to wait till slightly better news justifies slightly better terms.
Perhaps the most intriguing thought arising out of all this, though, is that the private investor may really be coming back into his own. It is too early to say whether this is true. There have been minor buying sprees before. But it is just possible that, after over two decades of persistent selling, the private investor is at long last coming back into the market. One major reason why he could be doing so is that the longexpected improvement in gilt-edged prices has not materialised, After three years of buying in the hope of substantial rises gilt-edged have not performed and it may well be that the private investor is finally losing patience with government bonds and wants to go back to real values. He may calculate that those that are left, which have survived the holocaust Under Mrs Thatcher, must be good value. He could be right.
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