Our assets are subject to the vagaries of the financial markets
Looking back over the previous months, market volatility has never been far from the surface, with stocks, bonds, currencies and commodities all experiencing high levels of daily and even intraday changes. The fundamental moves were triggered by inflation and economic surveys by leading market experts and of course the ongoing situation in Ukraine.
While there are significant structural differences and different strains in the UK, Eurozone and US economies, they all generally face similar problems. Of the three, the UK economy is perhaps the most vulnerable, with many economists expecting the second quarterly GDP of the year to miss the Bank of England’s expectations of 0.1% growth – the most commonly used definition of a recession is two or more consecutive ones following quarter of negative growth.
past recessions
There have been few recessions since 1990, but looking back on the most recent, the “financial collapse” that began in 2008, it is perhaps surprising that stock market returns were positive just 3 years after they began. Some of this can be explained by the fact that for an economy to technically go into recession it has to experience two quarters of negative growth, and hence the starting point for these performance numbers comes after the economy has been contracting for half a year. In general, however, recessions last another three quarters, which makes up most of the next year when market returns have been positive. Furthermore, as we all know from the past, financial markets have actually underperformed in the run-up to a recession than during a recession.
As for the dreaded inflation, yes, it is indeed at its highest level in over a generation, which in turn has forced central banks to take rather drastic measures to contain it. Although rate hike cycles have been aggressive in the UK and US So far, a similar trajectory is expected for the second half of the year. This poses a major problem for economic growth, which is already showing clear signs of slowing down, and calls for a recession are growing louder.
Performance is no guarantee of future returns.
However, recessions in past periods have not been that negative for equity markets – in fact, benchmark returns have been positive after previous recessions. A plausible explanation for this positive development is that financial markets are fairly effective forward-looking discounting mechanisms, which is why they often start pricing in a recession before it technically has started. They are also beginning to price in a recovery before it has clearly begun.
According to our own analysis, there is already a silver lining, UK benchmarks are already showing some weakness that would be expected with a growing risk of an imminent recession, but favorable idiosyncratic factors mean the FTSE100 Index is outperforming its peers year-on-year . to date. Has something gone wrong, or could it be that the UK sees the current financial turmoil as a short-lived challenge and we need to carry on and upwards…?
Blacktower Financial Management – Tel: +351 214 648 220 or email [email protected]
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