LETTER: Traffic light system for the stock market

I LISTENED to the question from Burnley MP Gordon Birtwistle to Prime Minister David Cameron during Prime Minister’s Questions prior to the Budget with incredulity, and the Prime Minister’s response with dismay.

Mr Birtwistle asked whether the rise in the FTSE-100 index to just below 6,500 from a low-point of 3,500 in 2008 was a sign that “real investors in the economy” agreed with the economic policies of the Coalition Government. The Prime Minister, typical of a politician, gave an answer that was irrelevant and meaningless.

The FTSE-100 index is not an accurate barometer of the national economy, nor the economic policy of the government.

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The index is composed of a great many companies that are operating internationally rather than within the United Kingdom only. Moreover, the level of the index is closely correlated to the stock indices of other exchanges, notably the United States of America. Stock indices have been rising across the globe, and this is one of the main factors accounting for the current level of the FTSE-100.

It is a pity the Prime Minister in responding to Mr Birtwistle’s question was unable or unwilling to give the correct and intelligent answer as would befit the high office of state that he holds.

The correct answer should have stated the twin policies of central banks of negative interest rates and quantitative easing is creating huge distortions in asset prices and investors that are seeking a real rate of return have been driven into asset classes, such as stocks, almost regardless of risk.

For the record, the current yield on the FTSE-100 is just above 3%. This is near the bottom of its long-term “normal” range and the likelihood that subsequent returns from stocks will be low is significantly higher than it was when the Index was standing at 3,500.

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One way of approaching the stock market is by using a system of traffic signals: red, double-amber, amber and green. When looking at individual stocks one will find having three buckets comes in handy: yes, no and too hard.

Any investor with a modicum of intelligence will consider that the stock market at 6,500 is showing “double amber” and be acting accordingly.

As for Mr Birtwistle and Prime Minister Cameron, with political antics like this no wonder faith in politics and politicians has collapsed.


Castle Road, Colne