Tomorrow has a habit of turning up sooner than you expect. The rise in the FTSE 100 index to its highest level since the financial crisis and a sharp fall in inflation that I presaged last week have happened rather faster than my cautious prognosis suggested.
First inflation. The drop in the consumer price index from 2.8% in March to 2.4% in April was certainly a stunner. One assumes that the Bank of England governor had some inkling of the news when he suggested that inflation would peak ‘a little lower’ than previously thought. He clearly expects the rate of inflation to climb sharply again in May and June if his new projected peak of 3.1% is to come about.
The pound unfortunately fell on the inflation news on the grounds that new governor Mark Carney will have more scope to stimulate the economy. A falling pound pushes oil prices higher in sterling terms, and it is a fall in fuel prices that has put a curb on inflation at a time when food prices continue to rise.
I do not believe that Carney will rush to stimulate the economy, especially if King’s other revised forecast, that the economy is set to grow by 0.5% in the second quarter, proves anywhere near correct. Carney’s stewardship of the Canadian central bank involved a good deal more prudence than was shown by Gordon Brown in his time as Chancellor of the Exchequer, which is why Canada is not in the mess that we are.
Nor will Chancellor George Osborne take much notice of the IMF urging less austerity and more spending on infrastructure paid for out of increased borrowing. Given that the IMF has demanded more austerity in countries such as Greece and Spain as a cure for their economic malaise, it seems odd to suggest that the one country that is starting to make austerity work should be told to abandon the policy.
The second figures covering gross national product (GNP) for the first quarter of the year confirm the first count, a 0.3% improvement, even though the Office for National Statistics (ONS) points out that slower growth in wages is hurting people's ability to spend. Despite the easing of inflation, wages are still rising far more slowly than consumer prices.
The ONS said the services sector, which accounts for around three quarters of the economy, was the main driver for growth, expanding 0.6% in the quarter. It has recovered steadily and is now above its pre-recession levels.
In a knee jerk reaction to the financial crisis, many politicians and commentators argued that we should never again allow the economy to become too heavily dependent on one sector and that we needed to rebalance. For my part, I am more than happy to see the largest part of the economy expanding most, especially until recovery gets fully underway.
Meanwhile, the construction sector, widely seen as the area that the government could and should stimulate, continues to struggle. It is being seen as a significant drag on economic growth but I do believe that will change over the next few years.
This hope for a slow but orderly improvement in the economy, rather than a mad rush that we will regret later, is to be welcomed. It supports the case for holding equities. Which brings us to the second instance of tomorrow arriving early: the stock market.
We have now, briefly, topped the FTSE 100 peak that we reached in 2007, with only the millennium dotcom boom to beat. Who, at the start of the year, would have thought that the index would clear 6,800 before the end of May? I certainly didn’t.
The FTSE, although the most followed stock market index in this country, is something of a laggard. Other UK indices have already hit new highs, as have several major indices abroad, so there could, and should, be further for blue chips to go.
I had intended suggesting that we were surely due for a correction after such a monumental run so far this year. My guess was for shares to fall back in June and/or July, with the upward momentum being resumed as autumn approaches.
This tomorrow has also arrived early, with a sharp drop to just below 6,700 points coming on ftse smalThursday. We should remember that the rise in share prices so far this year has been a comparatively steady upward march.
Swings of more than 100 points have not been unusual since the financial crisis and may again become the norm. Heavy falls represent a buying opportunity. Stay in for the ride.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
Market Performance: May 20-24
FTSE 100 Index: -0.56%
FTSE 250 Index: -2.06%
FTSE All Share Index: -1.08%
FTSE Small Cap Index: -0.08%
FTSE AIM 100 Index: -0.47%
FTSE Fledgling Index: -0.73%
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