Robert Tyerman evaluates the performance of the stock market.

Enjoy it while it lasts. The FTSE 100 Share Index’s foray above 5,000 for the first time in almost a year has matched a gathering consensus that economic and financial recovery beckon.

It was perhaps unfortunate that Gordon Brown should have assured the Trades Union Congress that the UK economy was on the road to recovery so soon after gold had peaked above US$1,000 an ounce, even if on a technical market squeeze. Bullion’s $1,011.15-an-ounce 18-month high was not only several hundred dollars above the level at which he himself had ordered much of Britain’s gold reserves to be sold, thus casting a possible shadow of doubt over the prime minister’s predictive instincts, but it also reflected a feeling somewhere out there that the outlook for Western economies and currencies might not be as rosy as the present recovery consensus would have us believe.

There are some influential voices of caution, including the National Institute for Economic and Social Research, and plenty of soothsayers talk of ‘w-shaped’ double-dip recession, rather than a straightforward ‘v’. But equities have caught the cheerful consensus, with the Footsie near the level it was at before the collapse of US investment bank Lehman Brothers just over a year ago.

Slowly rising
Both the market index in London and the Dow Jones Industrial Average on Wall Street are nearly 50 per cent up on their 12-month lows, though still a long way well below their historic highs – as indeed is gold, lately below $1,000 again, if its price were adjusted for inflation over a quarter of a century.  Indications that the recovery in China’s pivotal economy began to accelerate in August and official forecasts that the hard-pressed European Union’s economic contraction was poised to reverse have provided further stimulus to bulls already drawing encouragement closer to home from talk of property market rallies and resilient retail figures.

These and other signs show that the monetary easing and low interest rate policy of the Bank of England is working through to the stock market, property and, to some extent, personal spending, even if not yet in a significant way to the crucial areas of bank lending to industry and companies’ capital investment.

The annual inflation rate, measured using the government’s preferred measure of the Consumer Prices Index (CPI), is now below the Bank of England’s 2 per cent target. This gives policymakers leeway for continued reflation – until the inflationary consequences of ‘quantitative easing’, massive budget deficits and bank bailouts begin to make themselves felt with a vengeance.

Consumers remain price-conscious and concerned about the future, banks remain wary and companies are not going on any spending sprees, but the stock market is keen to believe good news.

A sweet deal
US processed cheese combine Kraft Foods’ £10.2 billion hostile bid for venerable British confectionery group Cadbury is, of course, exactly the sort of development the City likes to see, generating fees, portfolio profits, rumours of other bids and a search for new likely targets. Such bids are more often associated with mature bull markets, but Cadbury shareholders will not complain about their shares rising 73 per cent from their year’s low to 780.5p, with more gains probably on the cards.

Another symptom of this mood has been renewed interest in leading hedge fund manager Man Group, whose shares have been subject to repeated bid speculation and suggestions from the company itself that the hedge fund industry would see net inflows of client funds by the end of the year. The shares, which had slumped over the past 12 months from 513.5p to 152.6p at one point, have rallied to 289p.

Deal talk has helped lift pan-European electricity generator International Power to 293.9p at one stage, before it eased to 288.5p, between a year’s low of 182p and a 364p high. Rumours of a US bid put a glow on medical device specialist Smith & Nephew for a while, but the shares have lost some earlier ground and fallen back to 554p.

Bid attention from Spanish families and others have lifted public transport group National Express, still reeling from over-bidding for the east coast rail franchise, from a depressed 151.75p 12-month low to 478p, still less than half its year’s high of £10. Among the smaller groups, oilfield services concern Wellstream, which maintained its interim dividend despite a halving of profits, enjoyed a flurry on hopes of an Italian approach before easing back to 612p.        

A bearish factor for stock market indices, even if potentially good news for industrial companies, has been weak commodity prices.  But massive oil and gas finds by BP and BG Group have seen their shares close to 12-month highs.

BP’s discovery of the Tiber Prospect in the US Gulf of Mexico 250 miles south-east of Houston, potentially containing three billion barrels of oil and possibly as large as the North Sea’s Forties Field, has taken its shares to 543p, within hail of their 560p 12-month high and well above their 376p low.

BG, meanwhile, has risen to £11.10, only 65p short of its year’s high and almost 70 per cent above its 664p low on the strength of its discovery of the Guara field in Brazil, holding a potential two billion barrels, of which analysts claim a significantly higher proportion will be extractable than from Tiber.

Robert Tyerman is news editor of Growth Company Investor, the UK’s leading magazine for AIM and small-cap analysis.