News

24/11/2008 - Pessimism for pessimism's sake

'Markets only reach their nadir as investors hit the point of maximum pessimism. The last seven days saw further signs this point had been reached as market participants seemed determined to see the worst side of every piece of news. Retail sales were down just 0.1% for October – a much stronger performance than expected – and yet the market just looked on gloomily and kept sliding down.

Now, admittedly there are plenty of other forces at work, but retail sales figures are a vital indicator of the UK’s economic health. Analysts had predicted a 0.9% drop after September’s 0.4% fall. Food sales actually rose – not by much, but enough to suggest a small patch of blue sky.

But instead, analysts were quick to suggest reasons why things were just as bad as they had predicted: discounting by retailers had skewed the numbers; food sales may have risen, but discretionary spending was clearly in trouble. They stopped short of suggesting that people were temporarily comfort-eating, but perhaps they are saving that excuse for the Christmas season.

These retail sales figures come before any interest rate cuts have had a chance to take effect. This week also saw the oil price dip to around $50 a barrel and inflation fall to 4.5%. Team this with the cuts in VAT that formed a key part of the Chancellor’s pre-Budget report, and a significant part of the population should have a lot more disposable cash in their wallets by the middle of next year.

Yes, of course, there are those who will have lost their jobs. Consensus estimates suggest this may be around 1m by the end of 2009. Then there are those who still need to remortgage. But there remain a lot of people in work, with decent mortgages in place, who will be better off. Ultimately, these retail sales figures suggest that everything is not as calamitous as billed.

But is it enough to suggest selective reinvestment in equities may be a good idea? It is certainly another indicator we are nearing the bottom. A number of fund managers have predicted the stockmarket will start to turn at the beginning of 2009. These retail sales figures are just one piece of good news amid a slew of awful news, but they do suggest the apocalyptic scenario currently priced into markets may not be correct. Come next year, there’s just a chance that capitalism as we know it may continue to exist.

The Week in Focus is provided by marketing-hub.co.uk

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