Vincent Boland: This bull isn't running

news.ft.com Published: March 21 2003 17:35 | Last Updated: March 21 2003 17:35

It looks like we've had our "war rally". In the few days since it became obvious that diplomacy at the United Nations had failed and that a US-led attack on Iraq was inevitable, the S&P 500 index has risen 9 per cent, the Dow Jones Industrial Average 9.6 per cent and the Nasdaq Composite 10 per cent.

These figures are impressive enough to be 12-month returns, though they apply only since March 12. Tobias Levkovich at Salomon Smith Barney has written about how the market can expect "short but vigorous rallies" in what is essentially a war environment (Iraq, Afghanistan, terrorism).

This week's was one, based on the view that the imminence of war suggested the beginning of the end of the Iraq crisis; there will be more in the weeks ahead. It was also the longest daily winning streak for nearly three years, which shows just how volatile trading has been since the start of the bear market.

And that is not the only good news: oil prices have fallen by 20 per cent; the yield on long-dated US Treasury bonds has risen by 40 basis points; and the US dollar is improving against the yen and the euro. Financially, when it comes to war, what is not to like?

Rather a lot, according to a queue of Wall Street observers. For a start, they point out that stock prices are going nowhere. Market rallies such as the one we saw this week are the equivalent of running to stand still. Since the start of the year, the Dow and the S&P 500 index are slightly down (roughly 0.5 per cent each).

Only the Nasdaq stock market has posted a gain - of a respectable 5 per cent, symptomatic of the short- term, trade-the-volatility nature of the market in the past few months.

According to David Bowers, the chief investment strategist at Merrill Lynch, investors are still extremely risk-averse, though sensitive to any change in the perception of that risk. He ascribes this week's rally to just such a change. "Any slight reduction in risk will see money go into the market," he says.

According to Merrill's latest survey, investors believe the US market is the most expensive relative to other major regions, in spite of an ostensibly improving outlook for corporate profits. Some 46 per cent of investors say the US market is fairly valued and 22 per cent believe it is overvalued. This is not the basis for a resumption of the equity bull market.

Investors consider that stocks elsewhere are cheap, but not necessarily a "buy". They also are "unambiguously bearish" about long-term interest rates and the economy. Almost two-thirds of the investors surveyed believe that global bond markets are over- valued.

This suggests that the end of the bull market in bonds may simply have been postponed rather than cancelled, because of the current uncertainty.

On the broader economic front, there is little evidence that capital spending is being increased; there is even less reason to believe that an end to the war will be the stimulus required to get it going again.

So, with little basis for the view that the market is about to benefit from a post-war recovery, the attack on Iraq is entirely marginal to the fate of stock prices.

The post-UN rally has already in effect run out of steam as investors were reminded that some of the longer-term problems that plague the market have not gone away.

The crisis in Venezuela is merely on hold while North Korea bubbles in the background. There is also the unsettling prospect of what the rift in transatlantic relations means in the longer term.