Bear'S Growls Fail To Frighten

So when the FT-SE 100 index in the UK approaches 4,000 and the Dow Jones Industrial Average in the US edges towards 6,000, it is not surprising that the media start to pay more attention to the stock market.

But it can be easy to forget that reaching new peaks is the natural order of things for equity markets. Over the long term, profits rise with economic growth and inflation. The valuation that stockmarket investors place on those profits may vary from time to time, but the trend is remorselessly upwards. The Footsie has now risen nearly fourfold since it was launched in 1984.

 

The past few years have seen ideal conditions for the US stock market in particular. Inflation has been low, and occasional scares about price pressures, such as occurred in 1994, have come to naught. As a consequence, central banks and governments around the world have been able to allow interest rates to drop. In the US, the Federal funds rate averaged 9.4 per cent between the start of 1981 and the end of 1990. Since then, the rate has averaged just 4.5 per cent.

The US economy has been growing steadily since 1992 at rates of between 2 per cent and 4 per cent a year. All in all, the US has seen a Goldilocks economy, in which growth has neither been too fast to cause inflationary pressures nor too slow to restrain profits, but just right. On top of that, the US corporate sector appears to have been able to cut its costs and become more efficient over the past 10 years. This is partly because of a shift towards greater flexibility in the labour market and partly because of the competitive edge given by the persistently weak US dollar. According to Goldman Sachs, the US investment bank, the operating profits of companies in the S&P Composite rose 15.6 per cent in 1993,!-- #include virtual="/incs/right.asp"-->