Time to buy yet?
Market report
CIO view
A collective sigh of relief is one way to view the capital markets’ action of the last few weeks. As incoming data have continued to unevenly whisper that the peak in US inflation is finally behind us, some market pressure has been released. Real interest rates have fallen back from recent highs, stocks have bounced, as has gold and other assets that 2022 has so far been mean to. Note that past performance is not a reliable guide to future performance.
The obvious question for investors is whether now is finally the time to buy this painfully long dip in stocks? The answer for tactical investors, constrained by time frames of months not years, is probably not yet. We may indeed be finally moving beyond peak inflation fear. Over time that could see central bankers relax a little. However, convictions should obviously be low in this area. Yes, there are multiple indicators tentatively pointing to victory in the war against inflation (Figure 1), however we shouldn’t need reminding of why humility remains appropriate here all the same.
Even if the peak in inflation has been passed, it is likely a long way until this inflationary episode can be considered vanquished – the path to 2% is likely long and winding, with plenty of room for disappointment along the way. Meanwhile, we are still only guessing at the economic price the US and global economy owe for the steep rises in interest rates of this year. Lags in the system mean that these effects are only just starting to gather (Figure 2).
Our sense remains that a recession is the most likely scenario, rather than the more benign paths increasingly favoured by the average investor. On balance, that suggests earnings estimates have another leg lower to endure, as do the company share prices these estimates help inform.
Longer term investors should ignore all of this obviously. Next year does look difficult, but the degree to which market pricing is misjudging that strife is a matter for the edges of your investment assets, not the core. The core of your portfolio will tend to be much more stable as it is aiming at a much larger and more important investing prize – the growth in productivity of the planet. Some will understandably worry there too. Not only has measured productivity been disappointing these last few years/decades, however surely a recession would dry those innovative juices anyway?
An interesting (and perhaps terrifying) example from history is the great depression of the 1930s. It may strike some as counterintuitive that the most protracted period of economic suffering for the US and global economy in the last century was also a period of impressive efficiency gains. To what extent this period of broad-based productivity improvements stands out relative to others forms part of a debate about the future path of productivity trends. Has productivity growth, as some argue,[1] clustered around a few key inventions in a few key periods, with the best of those now long behind us? Or has the process of making more output for a given set of inputs been a smoother, broader, and more reassuringly continuous process? The latter view would likely bias us to greater optimism for the future potential of this dominant strut of economic growth and improving living standards. However, there is also reassurance to be found in this debate about recessions, even the worst ones, and innovation.
The 1930s was an amazingly technologically progressive decade. One characterised “…by progressive programs in a remarkably large number of industries and sectors. The advances in chemicals, long distance communication, electrical machinery, structural engineering, and aviation proceeded largely independently of the Depression.”[2] This breadth of productivity growth does stand out relative to other periods of accelerated change, contrary to Gordon’s (2016) theory.
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There are a couple of notable aspects in this for our purposes. First, the seeds of this widespread surge in US productivity were sown decades before. Many cite the cracking of the periodic table in the second half of the 19th century as central. This illustrates how the scientific and implemented technological frontiers can relate to each other. Scientific breakthroughs ultimately light the path ahead for businesses, who benefit once they have worked out how to practically use them. This process can take a while, as we see with electrification.
Second, although the 1930s was certainly impressive in terms of efficiency gains, as we have chipped away at the statistics, incorporating the latest thinking on labour quality and other changes of the period, it stands out a little less than previously argued. This is positive for those looking to argue with the productivity doomsayers, such as Robert Gordon. A smoother, more continuous trend in productivity gains would suggest that we haven’t done with inventing all the important stuff, from electricity to indoor plumbing. Not by a long shot.
The final point is about recessions and innovation. In a sense, this parable of the great depression would suggest that innovation exists outside of the economic cycle. There are nonetheless many ways that economic downturns can affect measured productivity and thus long-term returns to investing. Not all of those are negative, as our 1930s example suggests. In terms of the implementation of new ideas, recessions can play a positive role in making space for the new businesses to operate, by clearing out some of the old. There is also a sense that necessity can be the mother of invention, or at least adoption. Certainly, the search for efficiency can become a lot more urgent at such times.
There are always reasons not to deploy your hard-earned savings into capital markets today. Right now, those reasons may appear compelling – from the interest rates now available on some savings accounts to the economic horrors that seem to lie on the other side of the mince pie mountain.
However, those interest rates are also part of the diversified funds and portfolios that we offer. The difference is that these slugs of globally diversified investment exposure also link your savings to the future innovative potential of our remarkable species. The evidence is growing rapidly that we are now beginning to implement the recent advances in Artificial Intelligence more broadly. This is only one of the areas of potential technological excitement in the years ahead.
Those sitting nervously on the sidelines, even considering the more attractive real interest rates on offer, will miss out on this potential bounty. The price of accessing all of this future innovation has fallen sharply this year. Meanwhile, the prospects for that global productivity surge, on which future investment returns rest, is actually solidifying. The wise will close their eyes and take the plunge.
[1] Gordon, Robert J., “Introduction,” in The Rise and Fall of American Economic Growth: The U.S. Standard of Living since the Civil War (Princeton, 2016), 1- 24.
[2] Field, Alexander J., "The Most Technologically Progressive Decade of the Century," American Economic Review 93 (Sept. 2003), pp1410.
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I am an Agile Purpose-driven & Mission-centric Risk Management & Regulatory Reporting Professional.
1 年Sometimes What seems like a poison is a health nostrum potion. the same principles apply to the economics.
The Future belongs to those, who create it.
1 年In my honest opinion, William, once the Major Geo-Political Indicators start to ease & Global (or Local) Economic Indicators start showing signs of reaching Pre-Covid or even better than Pre-Covid levels, such as Consumer Confidence starting to get high (leading to more Demand side activity), Labour Participation starting to reach Productive levels (leading to decreased unemployment & thus more cash at hand for consumers on the Demand side & producers on the Supply side) & Inflation, especially, starts to show signs of having Peaked & easing in the future (leading to some extra cash at hand for both Consumers on the Demand side & better margins & a less costly access to Capital for Producers on the Supply side), we should be Good and on our way to #BuyTheDip. In short, while global data suggests that Inflation might have peaked (we might not be sure yet) leading to interest rates staying unchanged for a bit of time, Labour Participation is good (Unemployment is down) & that Supply is being provided ample time to catch up with Demand, I think the markets might have bottomed already or may bottom soon in the near or very near future, so we could or may be should, be good and be well on our way to BUY.