The final quarter of the last year of the current millennium has arrived. Financial indicators and the likely upward trend in interest rates provide a decidedly mixed bag for investors in the stock market. As the table below highlights, during the third quarter of the year, share prices declined quite sharply in virtually all the major markets.

The US stock market suffered a decline of 6.6 per cent, while Britain and Germany were close behind with falls of 4.6 per cent and 4.3 per cent respectively. The Irish market actually held up relatively well during the quarter, declining by 2 per cent. However, in the year to date figures still show that the Irish market has lagged behind the major markets by a significant margin so far this year. At the end of the third quarter the Irish market was down almost 6 per cent for 1999, compared with rises of 4.4 per cent for the US and 2.8 per cent for Britain.

Only Japan and the other Far Eastern markets are now exhibiting very strong rises for the year so far. However, the sharp recoveries in the Japanese and Hong Kong stock markets have still only recouped some of the very severe losses suffered by these markets in previous years.

Weakness in the third quarter now means that there is now a real risk that the US and some of the major European markets could show declines for 1999 as a whole. The economic and financial background presents a very mixed picture, not to mention the fact that as we near the Y2K date, many market participants are likely to limit their activity.

Probably the greatest risk to current equity market valuations is the very gradual but steady creep upwards in interest rates. Short-term interest rates have already risen in the US and Britain, while the new European Central Bank has been sending a series of signals that point towards higher European interest rates. The economic justification for higher interest rates is clear cut and the only issue is how high rates will have to go during this current cycle.

It is the strength of the US economy and to a lesser extent the British economy that justifies this higher interest rate trend. US consumers have underpinned several years of very strong US economic growth. More jobs and growing earnings have funded much of this extra demand.

More recently, however, it has been funded through a reduction in savings. This has now reached the point where the savings ratio of the US personal sector is now negative. In other words, taken as a whole, US consumers are now spending more than they are earning.

The strong US stock market has created the "wealth effect" that has spurred this consumption. It is clearly unsustainable in the long term.

The economic background in Europe could not be more different given that economic growth has been quite weak for a number of years. Growth is now picking up and with European interest rates at less than half the level of US rates, a gradual rise from the current level of 2.5 per cent seems assured in the coming six to 12 months.

For equity investors the only silver lining in the cloud is that stronger economic growth should enable company profits to continue to grow. Will the positive impact of rising corporate profits be strong enough to offset the negative impact of rising interest rates?

Only time will tell, but an uneasy stalemate could well be the eventual outcome with stock markets remaining largely volatile and directionless through to the new millennium. Therefore, investors in the Irish stock market could well find that 1999 proves to be the first year of a negative return since the 2 per cent decline experienced by the market in 1994.