The monthly message

We don't need to enquire too deeply if this is grounded in rationality, although I am going to touch on that. However, it should be helpful to get an idea of how long equanimity can prevail.

As to the rationality, or lack of it, that underpins securities markets, I suppose we only have to say the name, 'Mr Market'. This is the fictional manic depressive invented by Benjamin Graham to explain the market's bipolar nature - either euphoric or suicidal. In other words, markets are driven by emotions first and by rationality second, and the function of investment analysts is to apply layers of rationality to explain where the emotions of market protagonists - their fear and their greed - are taking a market anyway.

In the struggle between risk and return, markets go through spells when they ignore the former in pursuit of the latter; just as now they ignore the risks posed by, say, the lack of a banking union within the euro area or the dysfunction at the heart of US politics. But there is always a limit to how long that can continue. After all, when prices are driven up then, by definition, future returns are driven down and that must raise the level of risk. Markets can be good at forgetting this inconvenient truth - sometimes for long periods - because it can seem that rising prices generate higher returns. Ultimately, this is always a dream. Sooner or later, markets wake with a jolt.

As to how long this relaxed attitude can prevail, the table offers pointers. It is based on the monthly returns from the FTSE All-Share index since the start of 1990. Within the confines of that period - 286 months - we are in a uniquely good spell. In June the market ended its longest run of rising monthly returns; until that month it had risen 12 months on the trot. That is by far the best it has managed. No other rising sequence has lasted for more than seven months. There have been five of those, the most recent from July 2004 to February 2005. True, the All-Share's level dropped in June and then again in August. Even so, in the past 17 months it has suffered just two losing months - another sequence that is unmatched in the period under review.

Just how far this is above the norm is also shown in the table. In a typical - ie, average - year, the market will sustain four or five losing months; it will rise 6 per cent from the start to the end of the year; it will produce a 28 per cent gain from its low point to its high. In contrast, 2012 and the first 10 months of 2013 have been as calm as you like - just three down months in 2012 and - as noted - two so far this year; a gain from its low point of 14 per cent in 2013 (only two years have been calmer - 1996 and 2004); and an annual return of 8 per cent in 2012 and 16 per cent so far this year (on average, winning years produce a 15 per cent gain).

When the market turns - as turn it will - we can expect more losing months with more volatility. In the average losing year - just seven of the 23 under review, so perhaps not statistically significant - there are almost seven down months, a 15 per cent loss during the course of the year and a 36 point gap between the market’s lowest and highest levels.

At least, losing sequences tend to be shorter than winning phases. The longest losing run is just six months, from spring to autumn 2002 and within the whole time frame there are just two sequences of five consecutive losing months - in 2001 and 2011. But this is consistent with the notion that markets fall faster than they rise. For the best illustration of that, in the worst two successive months of the 286 under review - July and August 2008 - the market fell 24 per cent.

I am not suggesting a repeat performance is imminent. And as to when the market will break - that's largely guesswork. As I said earlier, the process won't begin with rationality anyway. But it would be sensible to assume that more losing months are on their way, with more volatility, too.