The stock market has historically been a good barometer of future economic activity. It tends to be 6 months ahead of other indicators, due to the fact that it represents the daily confidence of company bosses, either in their own investing, or in the conversations they have with institutional investors. However, the stock market has always been a poor tool for the policy maker, since it is so volatile that it is difficult to see the wood for the trees.
The FTSE100 recently broke through the 6,000 barrier. This may be volatility, but a comparison to the bond market may provide clarity. UK gilts have been unusually expensive in the last few years. So expensive that they yield less than inflation. This is partly a distortion caused by QE, but it is also indicative of capital preservation. Fear has governed the markets.
However, gilt prices have been falling recently, and the fall appears to correspond with the rise in the stock market. Are investors leaving safe-haven assets and returning to stocks? Are we witnessing the return of the Confidence Fairy?
Meanwhile in Westminster, we’ve been distracted by welfare reform, where our message was less coherent than the Tories’. Following the political parties was rather like watching a game of squash, with the Tories in the middle of the court lobbing the ball first in one corner and then in another, forcing Labour to run after it. Labour didn’t lose the game, they just didn’t control it. They kept up, but were out of breath by the end of it.
The party of incompetence should not be in charge of the agenda. They should be rushing blindly from one crisis to another. Immediately before the welfare debate, Cameron pointlessly exposed his party’s latent homophobia, while the Europe issue continues to startle, like a slow-motion firecracker, under the table. So the incompetence has not ended, it was just set aside for a moment of inspired tactics. Our fear is that this brief period of inspiration gives way to a new edge for the Tories, in the journey up to the next general election.
Our previous mantra was “Too far, too fast”, which worked at the time, and was proved correct, but we’ve moved on without having a new message to replace it. This has left the Tories to repeat their new mantra, “We’ve cut the deficit by a quarter”, as if that was the promise they made in 2010. However, the Tories do have a coherent message. Labour does not. We need one, fast.
If it is the case that the Confidence Fairy has returned to sprinkle her magic dust over the UK economy, then we need to make sure that she isn’t doing the same for the Tories, right now. We are not in a position to be complacent. If confidence and tactics have returned to the Conservative Party, they could start winning.