It was another cracker of a week. The FTSE 100 index rose to another all-time high to close at 8,433.76 on Friday. The Bank of England signalled that the first cut in interest rates might come as soon as next month. And growth in the first quarter of the year ran at an annual rate of 2.4 per cent. What’s going on?
The Footsie first. See this in global terms. The worldwide rally in share prices started in the US, and showed up particularly in the so-called Magnificent Seven – seven of the major big-tech corporations there.
But two things have been happening this year. Markets in the rest of the world have started to catch up, and within the US, the focus has broadened to other companies.
So while the S&P 500 index still dominates – it is up by more than ten per cent this year – the Footsie is not far behind, up more than nine per cent, and Germany’s DAX has done a bit better, up 12 per cent. And within the US, the performance of the seven has been mixed.
Apple is a great enterprise but its shares have been flat this year, while Tesla’s are down by nearly a third. Microsoft, on the other hand, has secured its place as America’s most valuable corporation, worth $3.08 trillion, up 12 per cent.
Some way to go?: The London market is still cheap by both US standards and its own historical ratings
So see the share performance here mostly as catch-up.
The London market is still cheap by both US standards and its own historical ratings, and that suggests that this re-rating could still have some way to go.
My own prediction that it would reach 8,500 by year-end looked hairy when I made it last December, but it now seems decidedly unambitious. We are not yet in June and a lot can happen in the second half of the year, but the trustees of UK pension funds that don’t own any Footsie shares have a right to challenge their managers for their failure in missing out on this boom.
It now looks like an evens bet on a cut in interest rates in June. Two things would make it an odds-on bet.
One would be for the Consumer Prices Index for April to dip below two per cent. The other would be for either the US Federal Reserve or the European Central Bank, ideally both, to cut their rates.
The Bank of England’s next monetary policy committee meeting is not until June 20, so those other variables will be known when it decides.
The shift of mood was triggered by positive comments by Bank governor Andrew Bailey and more importantly by Sir Dave Ramsden, deputy governor, voting for a cut. Ramsden is respected for his feeling both for the UK economy and for how financial markets behave, so that was a powerful signal.
The long path towards somewhat cheaper money will have begun – another reason for share prices to perk up.
And then on Friday came the news that the recession was over. Actually I expect the statistics boffins will discover that there wasn’t a recession anyway when they revise the numbers as more data comes in.
But let’s take the Office for National Statistics’ calculations at face value and accept that GDP in the first quarter did grow by 0.6 per cent. Multiply that by four, as the Americans do when reporting their numbers, and it is an annual rate of 2.4 per cent.
That is the sort of growth rate that the economy should be able to sustain over the long-run, and indeed has achieved over most of the past 200 years.
That is not to say that it will reach that level this year. But it is plausible that growth will be well over one per cent, and I could see it turning out close to two per cent.
It certainly makes the current consensus that it will be only 0.4 per cent look plain wrong, and the people at the International Monetary Fund and the Organisation for Economic Co-operation and Development, both of which have recently downgraded their UK growth forecasts, will have made asses of themselves yet again.
Let’s not get carried away. Remember the old stock market adage, ‘Sell in May and go away’. But it has been a good week, and not before time.
