The three things investors should know
With two wars raging and key elections ahead, the world looks increasingly volatile.
The fact that bad geopolitics are not reflected in the stock and bond market, where returns are good, is not a danger. In 150 years of financial history, the US stock market experienced only two non-finance-related crashes (1991 and 2020), both of which ended swiftly.
Meanwhile, despite entering a New Normal of less monetary policy intervention, central banks continue to underpin financial stability, and have been doing so successfully.
It’s hard to invest sometimes. Even to get out of bed for that matter. Now that we get our news instantly it seems that the world has gone mad. We have two serious conflicts, either of which can derail global affairs, increasing geopolitical fragmentation complicating supply chains, acerbic politics, crumbling demographics and a rapidly deteriorating environment.. We seem to be living at a perpetual dystopic precipice, be that cultural, health, economic, financial, political or geopolitical. And so it goes. Does it even make sense to invest in this world?
When I think of investments, and how dangerous everything is, I often hark back to one of my favourite movies, “Blast From the Past” (1999), with Brendan Frasier. In 1962, Frasier’s dad, played by the great Christopher Walken, is a scientist, who thinks that a nuclear end might be coming. He quietly stocks his house’s nuclear bunker (all the rage back then) and prepares for the worst. When a plane accidentally lands on his rooftop, the ever-ready dad, certain that World War III has begun, grabs the family, descends into the bunker and stays there for about 35 years. Meanwhile, life on earth continues and the family, emerging from the bunker, has a hard time acknowledging that nuclear catastrophe did not ensue.
Now it all seems silly of course. But back in 1962, a couple of decades after World War II, which had come a couple of decades after World War I, things did seem precarious. In 1962 Cuba, humanity (and all life on the planet for that matter) cut it closer than we care to admit. Yours truly heard as much during a speech from Marcus Wolf years ago (Wolf was the real-life “Carla” from John Le Carre's novels). But we lived and thrived. We sent a human on the moon (12 in fact). We danced our way through the 80s and the 90s. We joined up the world and shared our values, our trade, our technology and our ideas in a way that has never been done before.
Yet, it sometimes seems that every piece of analysis (this newsletter can’t be completely absolved from that particular sin) aims at uncovering another risk lurking that we are not mindful of. So with all the hubbub this year, it may be hard to reflect on the fact that as we enter the final quarter of the year begins, equities are up nearly 20%, more than double their annual return.
or that, despite the bond malaise, a simple 60% equity, 40% bond portfolio is having a great year.
So what is the catalyst for such a great performance? This is not a rebound year. That was 2023 when equities returned 23%.
It’s not government interference either. Despite increased fiscal outlays, economic performance hasn’t been that great. Between 2022 and 2024 US economic growth has hovered just slightly above its 2.5% average and is projected to slowdown in 2025. Europe, close to stagnation since the Euro crisis more than a decade ago, hasn’t fared much better.
Nor is it monetary policy. Along with above-5% interest rates, the Fed has reduced its balance sheet by 21%, nearly $2tn.
In total, since the end of 2022, the first year of the Ukraine war, global equities have nearly doubled their value (+46%). Bonds have had a decent performance for the period, +7%, although they have yet to recover from their losses during the recent rate hikes. And this performance comes in spite of, rather than because of policy.
For British investors, the numbers are a bit worse, but mostly due to the stronger Pound over the last few months (and who could complain about that?)
