We live in a world where we crave certainty. Economists are paid vast sums of money to tell us what they think and will remind us when they get it right. In reality, they rarely tell us when they get it wrong! The challenge is that there are so many moving parts to an economy that guessing the eventual outcome is almost impossible.
However, history provides an excellent guide to the future. Let’s start with interest rates in the UK. The chart below shows UK mortgage rates since 1995 and house prices.
I can’t say where interest rates will settle, but this shows that we have been in abnormal rates for many years and are moving towards a more normalised environment. This may see house prices coming down and a period like the nineties where it was cheaper to buy than rent.
So, what about markets?
Most of us have seen stellar returns from our investments post-2008 until the end of 2021. However, the chart below shows that the markets moved sideways.
The exception was the US.
Post a crash; most markets move sideways for years.
The last 18 months have been painful unless you have been invested in US tech. So, the question for many is when do things turn? Many developed economies have already moved into technical recessions. This is where PMI data declines for two months in a row. The information can be found on websites such as Trading Economics. The question is, why is that important?
Again, looking at data, the bottom of the market often comes during the recession.
Data would suggest we could be moving to the bottom of the market. Two things point to this. Firstly, look at the Fear and Greed Index and how this has declined into fear territory.
The second interlinks with this.
When I look at the chart below from 1 January 2022 to 21 September 2023 and consider the headlines, I believe we are at despondency.
If you look behind the headlines, there are positive things to be found.
I don’t know when markets will turn, but we are closer to that point based on history and data. Although the US market in places is expensive, much of the world is trading below its average.
This may mean that returns from the US are less than we have seen over the past decade, but that doesn’t mean there are no opportunities.
Some may argue against China, and my next blog will suggest why this could be counterproductive.
In summary, I am not an economist. I am, by my nature, pessimistic when it comes to investing. I search through data and history without being sucked into the hype. We have had a protracted period of negative returns; parts of the global economy have already gone into a technical recession, and investors have moved into fear territory. For me, we are touching despondency on the cycle of market emotions. The following 12 months could be an exciting and positive investment period. The challenge is that investors are likely to return once they see that, and therefore, they will likely miss the best period of returns.
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