Bear markets MONEY
NICHOLAS DAVENPORT
Goodness knows how many bear markets I have lived through. This is the sixth since the end of the war and if we could only manage our economic affairs like sane and intelligent businessmen we need never have another. We could rely on the steady growth of wealth through the increase in population, in material resources, in technological discoveries and im- provement in output and productivity, to have a perpetual bull market broken only by short periods of consolidation to enable the unit trust managements to recover their breath. What a hope!
My conscience is clear about this bear mar- ket. Here in this column I warned that it was coming on three occasions last year—on 13 Sep- tember, 11 October and 20 December. On the last I said, 'Farewell to the Bull Market' but it went on until 15 January when the Financial Times index touched 520 again in a blaze of strength. At that level the average price earnings ratio had risen to 211 and there was a 'reverse' gap of 41 per cent, that is, equity shares were yielding 4-1 per cent less than government bonds. Somewhat sadly I re- marked on 28 February that the City would never believe in a bear market unless (a) the Budget gave a shock, such as a rise in corpora- tion tax from 42-j- to 45 per cent and (b) there was a firm prospect of a return to power of Mr Harold Wilson. What converted the City to complete bearishness was first, the prospect of Mr Wilson remaining in power, having over- come every Cabinet crisis, until 1971, and secondly Mr Jenkins's harsher than expected Budget, which not only increased the corpora- tion tax by £105 million but SET as well by £130 million. The last straw which broke the Stock Exchange camel's back was the disallowance of bank interest as a charge against tax except for house purchase and improvement and 'proper' business expenses. As one broker has put it, the Chancellor could not have designed a better Budget for killing an equity share boom.
And Mr Jenkins meant to do it. In his Bud- get speech he remarked after announcing his savage tax increases: 'If this means a somewhat less buoyant Stock Exchange I would not regret that either. There is undoubtedly a relationship between a Stock Exchange boom and the level of consumption. No one would dispute it. But there is also a relationship between a Stock Ex- change boom and the growth of the economy. The fact that a bear market started on 15 January is the Stock Exchange anticipation of the temporary end of economic growth. Mr Jenkins declared in his speech that he was Pulling down the growth of the economy from 4 Per cent in 1968 to under 3 per cent. The signs of a domestic recession in building, motors, con- sumer materials, and textiles are now multi- plying fast and there are no signs that the gap is ?oing to be plugged by a commensurate rise in exports and industrial investment.
What Mr Jenkins did not bargain for was the conjuncture of a bear market in government bonds as sharp as the bear market in equity liares. One really cannot expect exports and Industrial investment to boom when the cost of borrowing for industry is going up to 12 per cent or more. In fact, when a company can- not readily finance itself, either through a bond issue because of a gilt-edged slump, or a rights issue of equity shares in a bear market, one can only expect industrial stagnation. That is the risk which the Chancellor is running through the sacrifice of growth on the altar of a pay- ments surplus. Of course he cannot be blamed for the external monetary madness which is forcing up the rate of interest to intolerable heights. But he can surely resist the pressure of the conventional bankers to put Bank rate up to 10 per cent. The present rate of 8 per cent is causing enough havoc. Since the Basle agree- ment we do not need 'hot' money from abroad to support sterling and Mr Jenkins might judiciously inform our IMF overseers that he is not prepared to push up money rates any further by reducing the supply of money to accord with their academic theories. He might well squash the demand for a 10 per cent Bank rate by threatening to impose an excess profits tax on banks to ease the crashing burden of interest charges on the national Exchequer. I can see no hope for equity shares until the slump in government bonds is brought to an end.
How long is the bear market in equities likely to last? There is no conventional time-scale for bear markets. Since 1951 they have varied in -length from two years and seven months to under twelve months. It all depends on the political set-up and the degree of government
intervention. Long before the war, when the full employment policy was not enshrined, the time-scale for bull and bear markets was the lengthy one of around eight years—four years up and four years down. The trade cycle at that time was largely psychological, depending on the greed and fears of private enterprise. When profits were sharply rising the entrepreneur be- came so profit-greedy that he overinvested and ended up with oversupply and falling prices. Postwar governments in the western world. being more humane and civilised, decided to abolish the old trade cycle and pursue a Keynesian policy of full employment. This put the trade unions into a strong bargaining posi- tion with the result that wages tended to rise ahead of prices. Tory governments thereupon pursued a 'stop-go' policy, applying sharp de- flationary measures whenever wages and prices had run ahead too fast. This brought the trade cycles down to around four years, two years up and two years down. The l.abour government promised to end the policy of 'stop-go' but, running into worse exchange crises, found themselves applying 'stop-go' with more severity on the 'stops' than even Mr Selwyn Lloyd attempted. We now find ourselves in the stop of all stops. To make matters worse the Government is not its own economic master. It has incurred massive short-term debts abroad in the defence of an untenable exchange rate and is now under the economic supervision of the IMF. it will count itself very lucky if it gets out of the stop under two years.
The last bull market lasted fourteen months and the rise in the Financial Times industrial share index was 80 per cent. Usually a bear market sees the loss of up to a third of the previous rise. So far the Financial Times index has fallen by 20 per cent—the index as I write being 414—and could fall on the conventional 'bear' view to 348. If it falls below the magic 400 figure it will probably do so. At the moment the average price-earnings ratio is 17.2 and not a few 'growth' shares are selling on a price-earnings ratio below that. No doubt the institutional investors — life and pension funds and unit trusts—arc waiting to acquire these 'cheap' equities (they have never given up their faith in the cult of the equity) and may be tempted to jump into the market on the first sign of any way out of our economic mess.
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