Art business: salerooms are still setting records, but stock market sentiment warns that a recession is likely to hit the art market soon

Apollo, April, 2008 by Ben Wright

Once again there was standing-room only at the February sales held by the large auction houses in London. Some came to buy, others to watch. Yet more wanted to get a handle on how the art market is standing up to the threat of recession in the us and the gyrations of global stock markets.

In the absence of crystal balls, many in the art market look to such sales for an indication as to the health of their industry. For some then, there will have been relief when a Francis Bacon triptych went for $51.6m and a landscape by the German expressionist Franz Marc made $24.3m (see pp. 64-68). Sotheby's sale raised $230.5m in total, the highest ever amount for its Impressionist and Modern Art sales in London. Christies auction the day before brought in $207.3m.

But despite these impressive sums, dealers reported an undercurrent of nervousness. Although the industry hangs on the results of the elite February auctions, many ask themselves how accurately they reflect the rest of the art market. Auction prices are only one, albeit the most visible, indicator of value in the market. They can, however, be manipulated.

'The auction market is highly orchestrated', says Andres Petterson, founder and managing director of ArtTactic, a UK-based company that provides research on the art market. 'The auction house can, to a large degree, compose a recession-proof sale ... by carefully editing out the speculative end of the market and substituting this with rare, high-quality blue-chip artists.'

Art-market indices are another edited version. They provide only a partial picture because they suffer from what financial market analysts call 'survivorship-bias'. Only those works that are selling, and therefore doing well, are represented. Works that are losing value and languishing in someone's collection are not factored in. Indices are also historical. Investing for the future with an eye on indices is, to use a simile from the financial markets, like driving down a road looking only in the rear-view mirror. A far better predictor would be to tap into market sentiment. One way of doing this is to take Sotheby's stock price as a proxy for the wider art market. Share performance is not only a reflection of how well a company is doing now but also how well the market expects it to do in the future.

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The auction house's share price rose steadily from June 2003 to a peak of $61 last October. Since then it has fallen by almost half to about $34 at the beginning of March. Sotheby's share price was subject to two similar peaks in the past 20 years. A year after the 1989 high, the Japanese stock and real estate markets crashed, dragging the art market with them. And in 1999, the stock slipped from its highs just before the bursting of the dotcom bubble. The question now is whether the fall in Sotheby's share price yet again presages a correction in the art market. If it is to follow the pattern of the previous peaks, the fall in the market will come 12 to 18 months after the Sotheby's share price reached its peak last October.

A number of companies have also launched indices that attempt to quantify market sentiment. Unfortunately, here, as with Sotheby's share price, the picture is far from rosy. Confidence in the contemporary art market dropped 40% over the second half of last year, according to a survey by ArtTactic. This biannual survey is based on the responses of 155 buyers of contemporary art, mostly international private collectors, to six questions on their perceptions of present and future conditions in the general economy and the contemporary art market.

In February, research company Artprice launched its Art Market Confidence Index (AMCI), which is updated continually in real time. AMCI is based on four questions, two of which concern the current situation, and the other two that elicit forward-looking statements about market conditions in the next three months. Despite a few upticks since the index was launched, it has largely been in the red. Artprice claims that the AMCI has proved that the art market and stock markets are more closely correlated than many had realised. A spokesperson for Artprice says: "The daily fluctuations of the AMCI seem more stimulated by the [US] Fed[eral Reserve] and the European Central Bank than by record sales at Sotheby's or Christie's?

It is becoming clear that the good news from the salerooms has little beating on the overall art market and those indicators that do matter are pointing downwards. One can at least hope that all the pessimism is itself a cause for optimism. ArtTactic's Petterson says: A dose of pessimism is not bad for the market, and could start bringing value in line with reality. We have to remember that it's during times of negativity that opportunities will arise.'