The wheels of the economy, like the wheels of God, grind slowly and at times exceeding small but they continue to grind in the right direction and investors have every reason to feel that they can grind out significant returns from their shareholdings.
Despite the erratic start to the year, the FTSE 100 has moved sideways, this week twice pushing above 6,800 points again and establishing a base to mount an attack on the 7,000-point mark which will be breached this year. If laggard investors scramble to use up their ISA entitlement for the current financial year, which has only six weeks to run, we could see a new record set by early April.
The first piece of good news is that inflation has fallen – just below the 2% target at last. While inflation can be good for shareholders, because shares are one of the few investments that consistently beat inflation, the continuing squeeze on wages has held back the recovery. We are nowhere near closing that gap yet but it is just possible that by the end of this year we shall see wages starting to rise in real terms.
Unemployment data was decidedly mixed. Depending on how you view the figures, unemployment went up or down. The reality is that the sharp fall in unemployment that took Bank of England Governor Mark Carney and his team by surprise last year has flattened out. The level is, however, markedly lower than it was this time last year and is likely to edge downwards in the coming months.
Meanwhile a modest rise in interest rates remains firmly on hold, leaving shares vastly more attractive than savings accounts. The talk is of a 0.25% rise just before the general election, a move that would normally be politically sensitive but which could suit Chancellor George Osborn just fine, as he would present it as further evidence that he has engineered an economic recovery.
Over in the United States, the Federal Reserve Bank is hinting at a rise in interest rates before then. This admittedly rather oblique indication, contained in the minutes of the January meeting, has been taken rather better than the first hints last year that the Fed would taper off the bond buying programme that has been propping up the American economy.
It seems, therefore, fair to assume that the stock market is finally accepting that the US economy is strong enough to stand on its own two feet and that this improvement is, as I have argued for months now, good news for shareholders.
The recovery remains undisputedly erratic. Housing starts, although picking up in the UK, remain way below pre-crisis levels. Retail sales were up strongly in January compared with a year earlier, with the heftiest gains in non-food, suggesting that consumers are starting to feel more confident. In contrast, the government budget surplus in what is a strong tax-gathering month was very disappointing.
Improvements in share prices are, therefore, likely to be erratic. Any sharp dips will present buying opportunities but I am not yet inclined to chase shares much higher than they are now.
Read part two of Rodney's February 21st 'The Week' here.
