City: Market may foil the prophets of doom

IT'S easy these days to join the doom merchants in claiming that stock markets are heading for an almighty fall. The London market is drifting and so is the Government, economic recovery is fitful at best and, anyway, half the market is away on summer holidays. Let's get depressed.

The way to dress up gut pessimism with respectable argument is to look to New York, where the market is said to be dangerously high. Most of Wall Street is agreed: President Clinton is a disaster and the market is horribly overvalued. If New York is overvalued, it's going to fall; and if it falls, so will London. Let's get really depressed.

But wait. This makes sense only if you think Congress is going to make a complete mess of the US budget. Making a mess means, broadly speaking, failing to do anything convincing about the deficit, such as slashing public spending. The Democrats know their jobs are on the line because of congressional elections coming up next year, so the incentive not to make a mess is great.

And - to get technical for a moment - New York may not be as highly valued as it looks. In periods of low inflation such as the mid-1950s and mid-1960s, for example, the average price of US shares was about 17.5 times corporate annual earnings. Inflation is also low now, yet the average price/earnings ratio is less than in those periods, at only about 16 times.

New York, therefore, may not be on the edge of an abyss after all. And London, which never followed it to such dizzy heights in the first place, is even further from the edge and less in danger of collapse. OK then, let's not get depressed after all. Let's have a quiet weekend instead.