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Market commentary April 2008

By April 7, 2008No Comments

US house prices have been falling now for 17 months, the downtrend having got underway some time prior to the “credit crunch” which began to unfold last Summer. Now US houses are looking good value, and we could be close to a point of some stability. In contrast the downtrend in UK house prices is relatively recent, and could have 12-24 months to run. There will be an economic slowdown, but we do need to keep some perspective.

In recent weeks and months there has been some extraordinary media coverage along the lines of “this is the worst it has been since the 1970s/Second World War/1930s”, and pages and pages have been devoted to credit crunch “survival guides”. A glance back at the 1970s provides perspective.

By 1972 unemployment, already at record levels, was rising still further. The year was punctuated by coal, rail and dock strikes, power cuts, the declaration of a State of Emergency, the imposition of a 3 day week (because there was not enough power production to run factories 5 days a week), and homes were without electricity for up to 9 hours a day. The average price earnings ratio for a buoyant UK stock market was an expensive looking 19, despite interest rates doubling during the year, and inflation quickly heading to double figures.

Into 1973 more cracks began to appear against the background of a consumer boom. Industrial action was now a daily occurrence, and the miners officially adopted a policy of confrontation (as if the strikes of 1972 triggering the 3 day week had been in some way conciliatory!). It was about to get worse.  In October came the Yom Kippur War, when Egypt and Syria attacked Israel. Israel got the upper-hand, Egypt used the “oil weapon”, and the Gulf States quickly raised the price of oil by 66%. By November a State of Emergency was declared in the UK, as coal and power workers upped industrial action, the railway workers were sabre rattling, and early signs of a banking crisis began to emerge. The stock market fell (only) 32% in 1973.

Against the latter backdrop, if you sense that 1974 was not going to be great, you would be right. At its worst the stock market was down more than 70% from the 1972 peak, somewhat worse than the 52% drop from 1929 to 1932 and 61% from 1936 to 1940. Dividend yields peaked at 12.5%, and gilts went as high as 17%. It was so bad that the constituents of the FT30 (the crown jewels of the British economy) could be bought by Saudi Arabia out of 6 months oil revenue. The highest income tax rate was 98%, corporation tax exceeded 50%, and the 3 day week was re-introduced. Wage inflation was heading towards 30%, and general inflation was projected to hit 25% in 1975. Strikes were running at twice the level of (an awful) 1973, and as Colonel David Stirling (founder of the SAS) put together a private army, there was serious talk of a coup.

These were three remarkable years. Can you spot any parallels with where we are now? On 18th March 2008, under the front page headline “How bad will the crisis get?”, the Daily Mail proclaimed “Investors were reeling last night after one of the worst days in living memory in financial markets”. Really? On the previous day the FTSE 100 index went down 217 points (not good, but not so unusual) and the US stockmarket finished up, yes, up. Inflation is around 3% (not 20-30%), and 95% of the working population is working. There are seldom strikes, no rationing, no coups in the making, no power cuts, we can bury the deceased, and our bins (usually) get emptied when they are meant to.

In summary, we shouldn’t allow ourselves to be distracted from acting on emerging opportunities.

Dennehy Wealth