Rough ride could last for months

WHEN the weekend newspapers forecast doom, gloom and disaster for the stock markets on a Monday morning, the wisest bet is to assume that share prices will rise. This is not because traders are naturally perverse but more because markets never fall in a straight line, and by the time such gloomy analysis appears the markets will already have fallen out of bed.

Last week was a case in point. For traders it was a scene of unremitting gloom as one bad news event piled on another. But even going downhill can require a pause for breath if the pace gets too hot. That is the most likely pattern for this week.

Equally perversely, there is not much in that from which to draw comfort. The fact that markets are unlikely to plummet in the way they did in 1987 does not mean that the fall is over. More likely it means that it will be more prolonged, with the pain dragging on for months rather than being got out of the way quickly. There will be rallies, some probably quite sustained and lasting several weeks, but the direction will be down.

Markets run on sentiment, and in marked contrast to the mood of spring, the tone is now downbeat, particularly in assessing prospects for America - the market which sets the pace for everyone else. There the recovery from the slowdown is now expected to disappoint. Companies may be busier than they were last year but competition is so fierce they are not going to make any money, and without profit there is nothing to undermine share prices. The result of this is that American investors are moving more of their money overseas and the dollar is beginning to fall which in itself is no bad thing but which could cause chaos if the gentle decline of recent weeks turns into a rout.

It is hard to be cheerful in Britain when the world's biggest stock market is in disarray, but we also have specific problems of our own. No one is quite sure how healthy the UK economy is right now, with official figures suggesting there is virtually no growth. That means any attempt by the Bank of England to raise interest rates to curb the house price boom - as it hinted it might have to do last week - could have serious knock on effects on the rest of the economy, bringing back memories of the boom-and-bust swings which we hoped we had put behind us. On top of that there are fears that big chunks of the financial sector, and the insurance companies in particular, have been caught out by the falling markets, and may have to make things worse by selling more shares themselves, to bolster their cash reserves.

Much of what currently looks so serious may never come to pass - but as long as the fears persist markets will be subdued. With the prospects of weeks like this, traders and investors may well decide it is time to head for a prolonged spell on the beach and hope that when they belatedly return, people and markets will be in a more cheerful mood. It could well take that long.