The UK stock market has drifted aimlessly since November 2003. The recent glut of positive earnings reports from companies on both sides of the Atlantic could not break the pattern. At the end of July, the FTSE-All Shares index sat very close to its start-of-year level.
Pundits offer many theories to explain why the stock market has lost its zip. Some blame the American economy. Others point to the bubble-like state of the UK housing market, rising interest rates, high oil prices, Iraq, a possible China meltdown and terrorism.
Each theory has its supporters. But the simple truth is that no one really knows with certainty why shares ran out of steam after a rip-roaring 2003.
So what lies ahead for UK investors? Here too, no one knows with certainty. It is at moments like now that history can provide a useful objective perspective.
Nine-Months of Drift
Several historical trends hint that shares will rise between now and year-end. One clue is linked to the drift of the last nine months. The gap between the lowest and highest price on the FTSE-All Shares index since November 2003 is just seven per cent, one of the lowest levels of volatility ever recorded in the UK market.
Since the second World War, there were eight other instances when shares drifted for nine months or more, with the gap between the lowest and highest price below 10 per cent. History teaches that shares eventually broke out to the up-side. There were no instances when a nine-month plateau eventually triggered a bear market downturn.
Four Per Cent Rule
Here is a second bear market trend worth thinking about. It is not widely known but UK shares fell by at least four per cent in the first two months of every single downturn since the start of the second World War. Most bear markets kicked off with a much larger two-month drop.
This year's high water mark for the UK stock market was reached on April 28. Shares fell just one-third of one per cent in the two months that followed. As far as this indicator is concerned, there is no sign of a bear market. The bull market is still intact.
Spotting Bull Market Tops
Other scans of the historical record lead to a similar positive conclusion. UK shares gained at least four per cent in the final three months of a bull run twenty times in a row. Most final three-month gains were much larger.
As far as this year is concerned, shares rose by less than two per cent in the three-month run-up to April 28. Here too, there is no sign of a bear market.
Second-Half Trend
These three trends offer some reassurance to investors that prices are not likely to fall by a large amount in the next few months. But they tell us very little about prospects for a rally. Prices could continue to drift sideways for the rest of the year, for example. This would fulfill the predictions made by each rule but disappoint investors seeking to profit from rising prices.
Happily, history provides an important reason for being optimistic about the rest of 2004.
There were 20 occasions since the Great Depression year of 1934 when the UK stock market either drifted sideways in the first half of the year, or rose very modestly. Shares rose in the second half of year 19 times. More than half were double-digit gains.
The single exception to the rule occurred in 1947 when we were in the midst of a serious post-war adjustment period. Problems of that era included protracted negotiations about the US-funded Marshall Plan aid package, adjusting to the loss of our colonial export markets, and aggressive labour union behavior that risked severely damaging the government's recovery plans. There are no problems of these magnitudes currently on the horizon, a good sign for the rest of 2004.
On balance, history tells us to ignore the doom and gloomsters who offer negative opinions about stock market prospects. A barrage of objective facts suggests high odds that further advances lie just ahead.