Please do not remove your seatbelts just yet

Equities need a visit from the style gurus. The emergency cut in American interest rates may serve only to highlight their recently rediscovered deficiencies. As the small print always states: prices can go down as well as up.

Last year's 10% fall in the broad US equities market, as measured by the S&P Composite Index, ended a four-year run where annual gains averaged more than 30%. Such advances were three times the long-term average. As such they should properly be labelled "extraordinary".

Investors are only human, however. They have short memories. It is little wonder, then, that expectations for equity returns have become conditioned by the experience of the late 1990s. This is particularly true of private investors. Surveys have revealed - at least until recent months - a "double your money" mentality that is at odds with history.

In the 20th century the S&P posted a calendar year decline 32 times. So one might expect US share prices to fall one year in three. But since1980 the S&P has only dropped one year in five.

The raw data suggest that stock market falls are not necessarily traumatic. Last year's was the worst since 1982 and over the long run was pretty much in the middle of the pack. However, the market does not work on annual cycles and, as in 2000, the top-to-bottom decline can be much greater than theJanuary-December movement. At its worst last December the S&P was 17% off its high.

Falling share prices also have a tendency to dislocate markets and economies. They force rapid and painful reappraisal of expectations with dramatic consequences.

This is the current experience in America. In a matter of months, the Federal Reserve's concern about inflationary bottlenecks has been replaced by fear of a hard landing. Such a high level of fear, in fact, that it has lowered interest rates in an emergency session. This is a measure normally employed only in times of perceived economic crisis.

It seems incredible to me that until very recently many glibly forecast a soft landing for the US without overt help from the Fed. The stonking growth rate of the American economy was built not just on the technology revolution but also on widespread belief in that revolution. The fervour surrounding technology bordered on the messianic and helped turbo-charge the economy.

It would be as foolish now to dismiss technology as a false idol as it was a year ago to hail it as an economic messiah. However, you can be sure that sceptics will have the upper hand in boardrooms throughout the US as tech proposals are put before investment committees. Many tech companies might even suffer sales declines this year.

The first reaction of investors to the 0.5% cut in the Fed funds rate was to mark equity prices up sharply, with particular emphasis on both the battered tech sector and economically sensitive industries.

It takes more than a day to make a trend, however. It might take more than one rate cut to arrest the economic slowdown. A reappraisal of the Fed's action is necessary and likely. Gloom might soon return to stock markets as investors realise that it is far too soon to anticipate the bottom in the corporate profits cycle. Rumours, such as those swirling around Bank of America yesterday, are just the thing to deepen the malaise.

The consensus view of economic prospects in the UK is also far too rosy. Although Bank of England governor Sir Eddie George recently cited a US slowdown as his biggest fear, the Bank continues to accord great weight to inflation risk. I fear it is driving by the rear-view mirror.

The more economists you apply to the interest rate question, the more likely you are to base your decisions primarily on the most recent historic data rather than on a value judgment about how the future will differ from the past. What Britain needs is a "flair" judgment to cut rates now.

Friday's Financial Times carried the results of work it had commissioned from Oxford Economic Forecasting to assess the dependence of the British economy on the US. I do not buy their conclusion that the relationship between the two is not as great as typically believed.

What the OEF's model is unlikely to allow for is the probability that British companies and individuals will determine their behaviour by the trends they perceive to have taken hold in the US. Comparing Britain's trade with the rest of Europe to its trade with America tells only part of the story. When was the last time Britain took its economic lead from the continent?

The European Central Bank chose to leave its short-term interest rate unchanged on Thursday at 4.75%. British rates are 6%. There is little reason for this differential.

Patience, then, investor. Let the trends unfurl a little before staking your portfolio on a continuance of the long term supremacy of equities. The world has not changed. It's just not yet back to normal.

Edmond Warner is chief executive of Old Mutual Securities


edmondw@omsecurities.co.uk