Wedded to a New Economic Theory - for a Little While; Private Investor's Diary SHARES: This Has Been a Week to Wait and See - to Divorce Yourself from Rash Action

Article excerpt


I THINK I may have happened upon a new theory supporting short-term but rapid economic growth, which augurs well for next year and the performance of the stock market.

The conditions for this theory only appear for a relatively short period and never last for more than a couple of years. It is a post-war phenomenon that started in 1951 and is due to enter its fifth phase in February 2002.

In 1951 a post-war economic boom was imminent; the working population grew and imports rose as home consumption increased.

Harold Wilson was drafting his "white heat of technological change" speech in 1963, the start of the next phase, as unemployment fell from 878,000 in February to 475,000 by October of the same year.

The "Barber Budget" of 1972 was the start of the longest phase, not all of which was marked by sustained economic growth. Indeed, the writing was on the wall almost immediately as the Chancellor announced the introduction of VAT in his 1972 Budget speech.

A much shorter period arrived in 1985 that lasted six months, but the "Loadsamoney" culture was upon us and with it, good times for many. The next and probably last phase is due to start early next year.

That most reliable method of valuing shares, the price-earnings ratio, has been on a downward trend since the end of 1999. The p/e ratio of the companies that make up the FTSE 100 index is currently hovering around 20. Although shares may appear expensive when measured on an historic basis (the average is 13.7), the theory's outcome since 1951 has been so consistent, it is difficult to ignore.

So, is this a good time to be buying into as many shares as you can? …