FOOL'S EYE VIEW
Eddie George: No New Year Nightmare

By Nigel Roberts
December 29, 2000

Chippenham, Wiltshire -- I woke up this morning, on the last day of trading on the London Stock Exchange in 2000, and switched on Radio 4 to listen to the Today programme. I heard the deep tones of Sir Eddie George, the Governor of the Bank of England, talking candidly about the prospects of the economy for the coming year, and very bearish he sounded! I joined the interview a few minutes in, and the first thing I heard was, "it's not a nightmare scenario..." Five words that were bound to wake me up in the morning! Usually when you hear some one saying that something is not going to be a nightmare, you can sure that the nightmare has already started.

You can listen to the entire interview here (it starts about 2 minutes in).

Eddie George said that "there are always things to worry about," that "we have had a very good run, with stable growth for a long period, falling unemployment and stable prices." But there looks to be a sharper slowdown than expected in the United States. He reminded us that "when America sneezes the rest of us catch a cold," and that "the impact of a slowdown in the US will be slower growth in the world economy". But as well as the "not a nightmare" comment, he did say that the future was "quite promising".

So what will really happen to the economy next year? No one really knows, but it certainly looks like we will see some slowdown. The question is: will this hit the performance of the stock market? It is said that the stock market is always looking ahead, so maybe the 10% fall that we have seen in the FTSE 100 this year was a predictor of a fall in growth the economy next year.

Over the last three years, there has been a massive rise in the number of individual investors making their own decisions and investing money directly into the stock market, and for these people it may come as a great shock that the FTSE 100 index has actually ended up lower at the end of the year than it was at the start. After all, this will be the first losing year since 1994. Even more experienced investors may have forgotten what it is like to be invested in a falling market; this year will only be the third in which the FTSE 100 index has fallen since it was created in 1984.

The trouble is that many of the new investors who were encouraged into the market but the apparent unstoppable "boom boom" growth of the stock market may now be frightened off. With the Governor of the Bank of England sounding slightly bearish it may be tempting for investors to cash in all of their investments and stick the money into a building society where it will be "safe". But if you are to be a successful investor you really must look forward: one year of poor returns does not suddenly make the stock market a poor place to invest your money. Have a look at this chart, which shows the performance of the FTSE 100 index since 1988. What can you see? It starts off well below 2000 and ends at 6200 – that's a compound rate of return of nearly 10% per year without the reinvestment of dividends, which is significantly better than you would have achieved by sticking your money into the building society over the same period.

So do we still believe that the best, and the safest, place for you to put your long term savings is in the stock market? Yes, we do!

To all of our Foolish readers, I would like to wish you a Happy New Year: and don't have nightmares!

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