I have been saying this for a while now, but I do feel that we have just entered a new chapter in the economic history books.
Us humans like to put things into groups and categories, we like things that can neatly fit onto a graph or chart.
Well… if the 2008 to 2021 period was one chapter, I think the start of 2023 firmly marks a new one (2022 was the transition year, the page turn if you will between one chapter and another).
In order to understand how these two economic phases might differ, let’s look at some of the key characteristics of the 2008 – 2021 era:
The world suffered from one of the worst financial crises in living memory – you would have to go back to the Great Depression in the mid 30’s to find anything similar in terms of size, scale or impact.
- Many major global stock markets fell by circa 50% marking one of the largest drops on record.
- In response governments reduced interest rates to near-zero levels across the world.
- In addition to ultra low interest rates, governments engaged in huge volumes of quantitative easing (money printing) to try and prop up their economies.
As such, the mantra for a stock market investor during this period was “sit back, relax, and let the tech companies grow”.
Most portfolios performed fairly well as most will have had some exposure to the tech titans that have driven the vast majority of global stock market growth over the past 15 years or so. Passive portfolios will have generally performed especially well during this time as they are often weighted based on the market capitalisation (total value) of the world’s stock market indices. Given that the US is by far the largest market in the world and the tech sector has driven growth in that market, passive portfolios have generally benefited from this.
Fast forward to 2023 and things look very different indeed:
- There are recessions forecast in many major economies.
- Interest rates are now well up into the 4-6% range in many developed nations.
- Inflation is running at near-record levels.
- Bonds which were either zero or negative yielding only a few short months ago are now yielding 4-6% in many cases.
- The growth that we are seeing in the market is far broader than before, but is being seen in very different market sectors when compared to the 2008-2021 period.
Of course we do not have a crystal ball and I have often written about the folly of making hard predictions about the future, however it seems clear from the above that we have entered a very different economic environment and the next decade will probably not look the same as the one that went before it.
We will of course be discussing these issues with clients during our review meetings this year, however if you have any questions about your own portfolio, please don’t hesitate to contact a member of the Buckingham Gate team.
