Things are changing at breakneck speed in the economic world at the moment!
It seems almost unthinkable that we entered 2022, just 9 months or so ago, with stock markets at or near record highs, bond markets also near all-time highs, and interest rates at or close to zero around the world.
Fast forward to September and how things has changed. We have now experienced 7 back-to-back interest rate rises in the UK (and odds on there are more on the way) with a similar story playing out across most western economies. Stock markets, and especially bond markets have struggled in this environment and now it seems almost inevitable that consumers will begin to suffer too as the cost of living continues to surge and borrowing costs increase.
It seems we are living in unusual times… or are we?
Well, it depends on your perspective.
Of course, if you were born at any time after around 1990, your entire adult life would have been lived out with near-zero interest rates and generally positive stock markets following the financial crisis of 2008. All of this will feel normal – it will be the status quo.
For those of us a little older, however, we remember a different time.
We recall the days of interest rates being much higher, cash savings paying a meaningful return, and inflation running at reasonable levels.
Those days may be returning. In my eyes, we have started the process of returning to some level of economic normality. You see, although the past 15 years have felt normal, from an economic standpoint, they have been anything but.
It is hard to recall, but most of the economic and tax policies we have been living with for the past 15 years or so were introduced as ’emergency’ measures in the financial crisis. It was unthinkable back then that interest rates would still be close to zero a decade and a half later!
Now, bear with me on this one, but as painful as this process of hiking rates and bringing inflation under control might be, I see it as healthy to a certain extent.
You see, for the past 15 years or so, the economy has been surviving on artificial stimulus measures (like using morphine to make the pain go away – it hides the symptoms, and makes you feel a lot better – but the underlying problem is still there).
As we withdraw this artificial stimulus, there will most likely be a painful period as the economy effectively goes cold turkey. However, I do see that as a good thing. It shows signs that the ‘patient’ is perhaps returning to health, or at least is beginning the process of actual recovery.
There are some silver linings here as well. From a stock market perspective, the actual announcement of a recession often signifies a relative market bottom and things can often recover quickly from that point onwards.
You see, a recession is a lagging indicator. Much like inflation, the numbers tell us what has happened not necessarily what is happening. By the time a recession is announced, it is totally conceivable that the economy has already started to recover and may even be growing again.
Now, of course, we have the usual caveats that the past is no guide to the future et al.
However, these ‘unusual times’ may not be that unusual at all – we just lived with unusual for so long that we forgot what ‘normal’ looked like!
