Meaning from Mixed Messages

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First published in Vista Autumn 2021

Markets are hard to interpret at the best of times, and these are not the best of times. Some things you can explain, some you can’t, and some are just weird. Fans of clean narrative and clear cause and effect ought to stick to physics or engineering.

Today’s markets are full of mixed messages. We have the rare occurrence of the US stock market yielding more than the 10-year treasury, while simultaneously close to an all-time high. Overall price-earnings ratios are higher than at any time since the dot-com era, but the dispersion underneath is the highest it’s been for 20 years. Corporate bond markets on the face of it imply easy conditions – a world away from stress and recession, yet the economy feels somewhat precariously poised in a recovery that is far from secure with many underlying weaknesses and fragility (such as £6bn of rent arrears on the UK high street, soaring energy prices, global supply-chain pressures , debt worries in China etc etc). Many areas have still effectively been living off government support despite the apparent strength on the surface.

Inflation stalks both the US and the UK, while interest rates remain low – for now, indicating a continued period of emergency supportive monetary conditions, while talk of tapering dominates market forecasts. Government deficits in the developed world have ballooned, with borrowing hitting post-war highs, while at the same time a fifth of all debt has a negative yield (including plenty of corporate debt).

The words stagflation and policy misstep are reliably making their way into investment commentaries.

Meanwhile, global equity markets have pretty much DOUBLED in the last 5 years, in the face of plenty of negative headlines and worry. While we’re in a smallish c5% correction at the time of writing, this ought to be far from unexpected given such a strong stretch of gains over the last year

Turning points / Talking points

As John Authers of Bloomberg has been reminding regular readers of his column, this August marked significant anniversaries of two market turning points. It marked 10 years since (arguably) the final bottom before the end of the global financial crisis, and where markets finally abandoned the prospect of higher inflation, ushering in a decade of continued ultra-low interest rates and the ‘inflation is dead’ narrative. It also marked 50 years since Nixon’s shock announcement which ended the era of the gold standard that had prevailed since just after the second world war. A reminder that markets do undergo significant shifts from one regime to another, but sometimes the turning point is only really clear after the fact.

Reality is messy and often resists the attempts of bulls or bears to pull out clear narratives. It’s almost as if things aren’t always black and white.

Investors, as ever, are left to balance holding true to timeless market wisdom while adjusting for new market dynamics in an ever-changing world & drawing out the meaning from mixed messages. In this sort of world, it helps to be clear on some of your core investment beliefs.

Luckily long-term investors have one big thing running in their favour. One piece of vital context that can often get glossed over is simply what a fantastic investment global equities have been over the last 120 years, through depression, multiple wars, multiple economic collapses and huge sectoral change etc etc (shown below using returns from the Credit Suisse yearbook).

A lot of brain cells in the investment industry routinely get burnt up trying to analyse growth drivers a hundered different ways, get ahead of the next big trend and going overboard trying to find “alternatives” (believe me, I’ve been there). Not to say some of these aren’t great investments but an excellent solution to the long-term investment problem is already there hiding in plain sight – global listed equities. This solution also happens to be fantastic value for money and very simple to access for investors of any size.

source: Elroy Dimson, Paul Marsh and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and Global Investment Returns Yearbook, Credit Suisse, 2021

More from Vista Autumn 2021 –

What long-term investors should takeaway from the memestocks phenomenon

Is inflation a hall of mirrors?

Re-thinking “emerging markets”

Your strategic allocation to slavery

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