Panic on the stock exchange
Nicholas Davenport
The slump on the Stock Exchange assumed such ferocity as to presage, it seemed at first sight, some national disaster. The fact that about £10,000 million has been written off the market value of equity shares in a few weeks (the total were valued in June at around £140,000 million) does not mean of course that private investors are directly that much worse off. The greater part of the depreciation will fall on the portfolios of the life and pension funds and other institutions and the private investors will feel the loss.; only in so far as bonuses on profit-policies are reduced. But they will feel very much poorer all the same — probably to the extent of some £4,000 million on their own private portfolios. The immediate effect will be to reduce their spending on house improvements, motor cars, yachts, luxuries, dining out and travel. They will be living it down instead of up. And the prevailing slump in house values will be quickened. I have never' been able to work out a reliable statistic but I have always assumed that when the Stock Exchange is booming, private investors tend to cash in and spend at least 6 Iper cent ofl their profits. Now they will have to cut their spending down for the next twelve months or so.
No doubt some of them have lately been in trouble through over-investing or over-trading. Towards the end of the account last week there.was evidence of panicky forced selling. Various ugly rumours flew around the market even about some finance houses and property companies. One of the silliest was about a firm of jobbers just because it leaked out that it was having merger talks with a larger firm of jobbers. That would be a sensible move seeing that the jobbing system is having a very difficult time. Suppose a jobber is short of one million shares and a bull of one million shares. The profits he would make on his short position could be wiped out by the 15 per cent interest charge on the one million shares being carried. In a panicky time, such as we have been suffering, the jobbing system could accentuate the falls instead of moderating them. On the other hand, when the turn comes it could accentuate the rise because it will be short of stock. But in my view the real turn will be along
time in coming although what is called a technical rally was enjoyed on Friday, the last day of the account.
It is the steepness of the decline in market values which has been the disturbing feature of this slump. There has been nothing quite like it before. Previously when news of some catastrophe has knocked the market for six there has been a sharp rally within a matter of days. But not so today. The market, according to the FT *thirty' index, fell 50 points over the last two week account and 52 points over the previous account — a total of 102 points or 24 per cent. At one time it was down 40 per cent from its top.
Apart from the ferocity of this sharp decline the bear market hlas been proceeding more or less on conventional lines. It lost nea ly half of the br market rise but it has not sunk below the bottom of the previous bear market whi h closed at 305 in March 1972. If I it were to do that we would have o consider a different ball game fr equities. The technical rally brought the index up from 328 to 343.
It may be useful to review the course of the bull aril bear markets since the Tories were first in office after the war. In the 1951-64 period they had two glorious bull markets, the first with a.rise'of 118 per cent from 1952 to 1955 and the second with a rise of 122 per cent from 1958 to .1960. I have often repeated my role for a classic bull market — a conjuncture of favourable politics and favourable economics. The gap between these two Tory bull markets, when the market fell over 30 per cent, was due to unfavourable politics — the Eden madness over Suez. Politics also deteriorated after 1960 — with minor ups and downs in the market — and a favourable conjuncture did not re-occur until 1962-1964 when we 'never had it so good' under Macmillan. However, it was only a modest bull market with a rise of 50 per cent over two years and three months.
Then came the Wilson administration with an unfavourable political background. Minor ups and downs in the market followeY until what may be called the 'devaluation' bull market developed — from November 1966 to January 1969 — a rise of 83 per
cent in two years and two montL. The favourable conjuncture had almost reappeared because, while Roy Jenkins was building up a surplus on the balance of payments, Harold Wilson and Barbara Castle were drawing up an Industrial Relations Bill to put the trade unions in order. Their humiliating surrender and the consequent wage explosion brought on the next bear market — a down slide of 41 per cent — which ended in March 1971. The bottom — 305 — was comfortably above the previous bear market bottom of 284. Mr Heath's bull market — from 305 to 543 — gained 80 per cent — much the same as Mr Wilson's, but he never had the favourable conjuncture. The trade unions were always fighting him over the Industrial Relations Act. He would have had better politics if he had just reintroduced Barbara Castle's Bill.
When I was last reviewing the course of this bear market on September 29 I said that I had always looked on 380 to 390 as the most probable low point (it was then 402). This was written before the oil crisis. The fact that the energy shortage will slow down the growth rate of the economy to below the Government's estimate of 31 per cent for 1974 and will also assuredly bring down thegrowth of world trade — causing a recession in Japan and the United States, not to mention some members of the EEC — makes it necessary to revise my guess. In fact, the disturbing
qUestion arises as to whether the bottom will keep over the bottom of the previous bear market which was 305. If it breaks through that point because of strikes and industrial unrest it will create, as I say, a new 'ball game' for equity shares. Whenever in times past I poured scorn on the 'equity cult' I used to get angry, if not abusive, letters. But it has now been proved for all time that equity shares are not a hedge against inflation, seeing that the market has had its biggest slump when inflation has had its biggest boost, and are not, therefore, reliable long-term investments. But they remain wonderful gambles — if you can time your entrance and exit right.
The National Institute of Economic and Social Research has had to alter dramatically its assessment of the rate of inflation. It is now apparent, it says, that the .Stage 3 proposals are more likely to accelerate than to hold back the rate of inflation. The sharp increase in import prices working through to retail prices is likely to bring the threshold agreements into effect little more than half way through the incomes policy year and thus give an upward twist to the inflationary process. Is it feasible, it asks, to consolidate a rate of inflation of 10 per cent. Is it possible, I would add, for Mr Heath to avoid going to the country for another mandate? This is a further point which will delay the consolidation of the bottom of this bear market.
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