It's different this time

There remains significant confusion about the outlook for the UK and world economy. Those looking for stuff to worry about are spoilt for choice, as normal. The surge in developed world interest rates this last year and a half(ish) is putting enormous stress on certain parts of the economy. Delinquencies are still rising in the US and elsewhere.[1] War rages, while wrestling superpowers threaten worse yet.[2] The world economy feels precariously balanced. The same goes for the various capital markets, from commodities to stock markets, that reflect her outlook.

Despite all this, stocks and bonds prospered this week. Some have wheeled out the ‘bad news is good news’ explanation. As signs of economic weakness proliferate, so the need for further policy rises from central banks fades. This creates a bid for bonds. As yields fall with recovering prices, the valuation headwind for stock markets softens too.

To that end, a more mixed batch of US economic data in the last week should be celebrated. However, this is of little use to investors looking beyond the next few weeks. Whether bad news is bad or actually good – an irritating and reductive concept in the context of efficient markets anyway – the sense we are left is still one of zero-sum economic misery in the path ahead.

What is going right?

We have spent much of the last couple of years reminding readers that ‘this time is different’ are far from the most dangerous words in investing. It is mostly a simple statement of truth - It is always different this time. There are certainly rhymes and patterns in history, but the differences are often more important.

From the perspective of the economy, the warping effects of the pandemic are still substantial. Delinquencies are coming from unsustainably low levels for a start. Excess savings (built up during lockdowns) are also still clearly allowing some households the option of spending more than they earn. Besides which, demand for workers remains strong across the developed world. As broader inflationary pressures continue to ebb, this strength is allowing incomes to grow in real terms for the first time in a few years.

Yet, as we’ve pointed out before, conflicts in eastern Ukraine, Gaza and elsewhere are destroying lives daily. The fact that around 7 per cent of the people who have ever lived are on the planet right now, means that there will always be enough bad news to fill a 24-hour news feed hungry for tragedy. However, we should not assume that we live in uniquely violent or even turbulent times as a result.

Relative trends in violence are of no use to those who have lost family or loved ones. However, such context is helpful in trying to determine trends therein.[3]

Investment conclusion

As we’ve pointed repeatedly these last few years, there are fewer facts and rules that we can marshal about the economy and capital markets than the industry often allows for. That doesn’t mean that there are no truths, no regularities to observe – there are. The most important of them is that growth is the norm not the exception. The world economy grows most years, because most years we invent new stuff and get better at using that new stuff - productivity. At its very simplest, investing is about profiting from that truth about the world.

The level of interest rates is just one aspect of today’s economy that will be unfamiliar to many. So too the role of government (not just the deficits but how they have been deployed), the technological context and much more besides. Such unfamiliarity often shepherds us towards the familiar as investors. The more the world would appear to convulse alarmingly, the more we look to what has worked in the past.

Such instincts are likely to prove unhelpful to investors. This is why within our globally diversified multi-asset class funds and portfolios we look well beyond the stocks, bonds and sectors that have worked in recent times. It is vital to always keep a foot in the dustier corners of the capital markets complex. This will help make your batch of investments more resilient to the many futures that do not extend in a straight line from the recent past.

(And if you want more attempts at clarity amid the ever changing investments landscape, don’t forget to subscribe to our weekly ‘Word on the Street’ podcast.)

Find out about our ' Ready-made investments' via our Smart Investor platform. A selection of five Barclays funds that each aims to increase the value of your investments over time, using a broad mix of asset classes from across the globe.

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[1] https://libertystreeteconomics.newyorkfed.org/2023/11/credit-card-delinquencies-continue-to-rise-who-is-missing-payments/

[2] https://www.theatlantic.com/international/archive/2015/09/united-states-china-war-thucydides-trap/406756/

[3] https://ourworldindata.org/war-and-peace

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