There is some evidence – but not a lot – that the stock market anticipates trends in economic activity, pruning back share prices when a downturn is expected and cautiously lifting those prices back upwards when better times are seen to be on the horizon.
The accompanying chart compares quarterly movements in GDP with the MSFI Index of marketing company UK share prices. There is some indication that, in the past, the share prices started moving in a new direction a few months before the economy changed direction.
If this evidence has any validity it would suggest that we are about to enjoy a period of economic recovery. Share prices have been moving upwards while the economy is still bumping along its depressed path.
One factor affecting the current improvement in the industry share price index is the demise of the poorest performers – companies like Adventis Group and Media Square. Thus the index is now benefiting from the better quality of its composition.
But maybe we are also seeing the first hint of a return to a more optimistic business mood. That would be a pleasing thought, although the evidence is fragile and only time will tell whether a simple chart can be taken even a mite seriously.
Bob Willott is editor of “Marketing Services Financial Intelligence”