George Pitcher: Forget the Tories, start worrying about the bears

In the old days, when the stock markets were simply a means for rich men to get away from their families, they used to say “sell in May and go away”. This was usually because the weather was improving and there was The Season to consider: profits were taken in the markets to provide a reasonable cash float for the Derby, Henley, Glyndebourne, Wimbledon and Madame Fifi’s Rooms of Relaxation just behind the promenade at Nice.

All that changed (with the exception of Fifi – 92 if she’s a day and still going strong) in the late Eighties, with the entry of foreigners, driven by a Calvinist work ethic, into the London equities market. The Season’s English venues became temples of corporate entertainment, rather than the exclusive clubs of wealthy individuals. And they’re none the worse, incidentally, for that development – corporations are, in my experience, far more demanding of standards than are individuals.

The Season used to glide effortlessly into the silly season, when smelly London was abandoned for the clean air and clear oils of the Ligurian Riviera. The odd stock got raided and assets were sometimes quietly stripped (this was back in the Sixties), but the summer months were not to be taken seriously. So there really wasn’t much afoot in the markets between May and September.

It wasn’t just the advent of foreign institutions that put paid to that. It was the period of unparalleled economic growth, interrupted by a recession or two, in the last quarter of the century that kept investors at their desks.

This year we have seen something different again. There were plenty of investors selling into the dodgy markets of May. But they didn’t go away. Apart from a couple of half-hearted spikes on interest rate cuts and better-than-expected economic news, they have been largely selling ever since.

No one seems to have made a great deal of fuss about it, but we have just been through one of the dodgiest bear legs in the London stock market since the dot-com bubble burst just over a year ago.

It may be that this has attracted relatively little attention because we’ve all been obsessed with the Conservative leadership contest. It really is extraordinary that there should be greater interest in the political opinions of a man with a quiff, a bald man and a man with a beer belly than there is in the equities markets going steadily down the pan, but there we are. I imagine that the Government couldn’t be happier, with all attention being focused away from its economic stewardship.

For the record, the FTSE 100 index started to drive down through the 5,500 mark at the start of this month, having spent the previous couple of months above 5,700. Given the ludicrous contribution to share-price inflation of Silicon Valley, the FTSE rather whimsically chose American Independence Day to lock into its decline, as Dimension Data warned of tougher market conditions, and Marconi dropped its little bombshell of a profits warning, taking its own price down by 54 per cent.

Last week the banks joined the re-rating as Lloyds and Abbey National were blocked by regulators from a further extension of the tedious tactic of building earnings through consolidation. Then BT and Vodafone showed the intense fragility of the telecoms sector by plummeting in response to price-fixing claims.

The FTSE fell for seven consecutive trading days. I don’t think that it has ever fallen for eight on the trot. There was a little rally towards the end of last week, but as I write on Monday it’s going soft again at 5,500. Corporate profitability has been in decline for the past seven quarters and if support in the market is broken at these levels over the coming weeks, then there are those in the City who believe that the next support level for the FTSE will be between 3,600 and 4,500.

I’ve said consistently that we can expect this kind of impact to come when the American markets take a proper tumble. The US Federal Reserve’s regular and rather panicky interest rate cuts have not had much effect on equities and bonds but, bafflingly, consumer spending is holding up in the US. Retail sales were down by 0.2 per cent in June, but only if you exclude cars. Including car sales, there was actually an increase of 0.2 per cent.

It can’t and won’t last. It’s supported currently by falling energy prices, but when American consumers wake up and smell the gasoline, they will collectively start switching from investment to savings, interest rates won’t be delivering and they’ll start to sell their equities portfolios hard. The knock-on revaluation in Europe may not be as extreme, given the relative over-inflation of US equities, but it will hurt.

It already is hurting in some UK sectors, such as telecoms and advertising. But these are just early indicators. While New Labour packs its buckets and spades to support the British tourist industry and Tories return to their constituencies to prepare either for government or oblivion, the real story is of a long and torrid summer for equities markets, after which there may be considerably less of an economy over which politicians can preside.

And it’ll be no good seeking comfort at Fifi’s – she doesn’t let anyone touch what they can’t afford.

George Pitcher is a partner of issues management consultancy Luther Pendragon