Fireworks and frights

The current outlook for the stock market does appear to be mixed

LAST week saw the widely predicted rise in interest rates to 0.5 per cent, a move that had been well signalled and should not have come as a shock.

And the London market certainly appears to have taken the move in its stride as it continues to trade at levels at or close to its all-time high.

Halloween usually marks a time of the year when people are anxious and fearful as winter draws near, in contrast with spring which is a time of optimism.

In the UK total returns (that is including dividends) have averaged 8.6 per cent from Halloween to May Day since 1966 but minus 0.5 per cent from May Day to Halloween.

This is not confined to the UK – prices tend to fall as the nights draw in and rise as they get longer in all stock markets. This generally indicates that prices are often too low in the autumn and too high in the spring, reflecting the optimism in spring and the tendency to be fearful in the autumn.

This year this appears not to be the case – or are we guilty of collectively succumbing to autumnal pessimism? The outlook for the market does appear to be mixed.

On the positive side, there is on-going growth in the eurozone, the market still has good momentum and there are any number of measures that point to further scope for upside in the market.

On the downside, however, there are fears of a slowdown in global growth (most notably from China), on-going concerns at the level of debt and of course the less than ideal political environment in various jurisdictions.

There are a number of leading indicators that market watchers can refer to, which have a reasonable (though not infallible) track record of predicting the stock market's likely path. These are now indicating a modest fall in the market in the year ahead, or more precisely that prices will hold up over the winter but fall from the spring onwards.

However, this is certainly not a given and it would be unwise to rely on such a prediction. Logic would dictate that given the length of time this bull market has lasted it is probably now on borrowed time, particularly when we look at past trends. Equally it is important to note that logic often has little to do with the market's path.

In the wake of the Brexit vote logic dictated that the UK stock market should fall sharply given the uncertainty, but with so many companies that depend on the US dollar for earnings, it had the opposite effect as sterling bore the brunt of the uncertainty.

It is, therefore, hard to predict the direction of the stock market as so many factors have to be considered. Rather than trying to second guess the general way ahead – which is notoriously problematic - there is almost certainly more merit in looking at individual holdings and assessing whether they still offer good value or whether it is worth taking a profit.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.

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