UK stocks still following historical pattern
Simon Ward
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Mostly for fun, in 2002 we calculated a “three bears forecast” for the FTSE 100 index based on the average performance of UK stocks during and after the three largest bear markets of the last century: 1929-32, 1936-40 and 1972-74. Much to our surprise, the “forecast” has proved a remarkably accurate guide to the broad trend in the market – see chart.
Significant deviations from the forecast path have represented buying or selling opportunities. For example, the FTSE overshot the three bears by 10% in April 2006 but subsequently corrected sharply to close the gap.
At the recent August low the FTSE was 13% below the forecast – the largest downside deviation since the current bull run started in 2003. This appears to have been another buying opportunity, with the three bears suggesting the index will return to 6700-6800 later this year.
Simplistic historical comparisons are bound to break down at some point but the economic, liquidity and sentiment backdrop still seems consistent with higher prices.
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