Year so far… and still to come

For investors, the story of the first quarter surrounds the continuing resilience of the US and global economy. At the heart of this resilience hums a US consumer and wider private sector (in mostly rosy cheeked financial health). Ebbing inflation has revealed growing real incomes in much of the developed world.

Higher interest rates are certainly putting specific parts of the global economy under enormous financial strain. Some still see the creaking US office real estate sector as a potential patient zero in the next financial apocalypse. There are of course other candidates too.

However, the familiar lesson from this quarter was to not allow oneself to become too absorbed by what could go wrong. There are always threats to economic growth, some of which the media is incentivised to dramatise. The more prosaic truth over longer periods of time is that spending time thinking about ‘what could go right’ is often more valuable to investors. (Figure 1) All as discussed on this week's Word On The Street .

Why no recession (so far)?

There could always be a recession or shock around the corner. It will no doubt look obvious in hindsight. This time there was good reason to be fearful. The untangling of pandemic distortions, combined with ‘hostile’ monetary policy, pushed many trusted recession indicators to sound the alarm.

So far, the mechanisms by which central bankers are supposed to be able to reign in their economic charges have been blunted by a range of factors. As we regularly warn – it’s not just different this time, it is different every time. There is also a sense that the organising frameworks many still use to orient themselves in the economic cycle are increasingly out of date.

If most economic cycles don’t die of old age as the saying goes, why should we bother trying to work out where we think it is in its lifecycle? Such frameworks are currently looking more confused than ever anyway. Credit spreads, unemployment rates and other assorted indicators argue for this cycle to have undergone rapid ageing.

However, signs of life in global manufacturing, industrial metals and some ‘early cycle’ sectors such as chemicals, combined with the robust balance sheet health of the developed world consumer, would emphasise the cycle’s youth. Many of the asset price moves of the last few months point to ever more investors embracing the more glass-half-full interpretation. The equity rally has been broadening beyond the US mega corps in the last month, in particular.?

Productivity pick up?

In amongst all of this is the growing excitement for this new batch of technologies taking the world by storm. The pickup in measured productivity in the US feels too early for AI’s large language models, or LLMs are they’re commonly known, to take credit. However, there are other potential sources of that pick up. The reminder here is that the subdued trends in productivity that have characterised much of the period since the early 2000s may not provide a useful guide to the path ahead.

Technology often moves in mysterious ways. Much like with the wider economy, we want to guard against our instinct to lean hard on history for organising rules and norms. There are of course regularities – these tend to be good periods for investors in aggregate. However, viewed from 10 years hence, there will surely be plenty to surprise us as to the bits of the economy and corporate sector that triumphed.

Geopolitics

This was of course a quarter marred (again) by tragedy in multiple parts of the world. Such horror invariably reveals the extrapolative tendencies in the finance industry (among others). The moment we are in inevitably tells us of why worse is to come – the chaos of a multipolar world order is upon us. Perhaps.

There is certainly much to worry about. There is also no cosmic requirement for humanity to build on the stunning progress of the last few centuries. Nonetheless, a close study of that few hundred years should tilt us towards optimism. Central to humankind’s remarkable success this last period has been our capacity for error correction . This is one of the forces that often renders extrapolative views of the future way wide of the mark.

Outlook

There are of course plenty of threats to face (visible and invisible) into the end of the year. The drumbeat for US elections in November is already drowning much out. Elections elsewhere also have potential to be important. For investors however, the focus should be on the underlying drivers of economic growth. There are ways that these ‘events’ can be influential . Most of the time we need to remember that these economies are way too big, various and complicated to be in thrall to one individual, whether President or central bank chief. The drivers of growth (and therefore asset returns) are alive and well. Invest accordingly.

And don’t forget, we cover these themes and more in our weekly ‘Word on the Street’ podcast. Find out more, here .

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