Market Update 11th December 2023

The long game

As we near the end of 2023, predictions and outlooks for 2024 have started rolling in, with rate cuts and lower inflation all predicted, it certainly seems those are looking like reasonably safe bets. Predictions of unemployment rates and recessions are a bit trickier. Last week saw the November US unemployment numbers fall by 0.2% to 3.7%, which was below the consensus of 3.9%. However, the general outlook is that unemployment will rise, but slowly. The economic environment next year is of course important, but markets go through cycles and short-termism plays into this and it’s a behaviour investors struggle with.

Short-termism in investment is the concentration on immediate profits at the expense of the longer-term investment goal. The past two years have been an excellent lesson. New technologies and market volatility both can cause investors short-termism and it can result in investors losing money. M&S sold off in 2022 falling over 60% from peak to trough, largely on cost-of-living fears in the UK, a short-term view being that largely discretionary retail was not the place to be. Anybody taking a longer-term view would have seen the stock rise 180% in 2023, starting from a historically cheap valuation point.

Sustainable investing became an investor favourite and peaked during 2021. There is a combination of factors for this, one being that investors genuinely cared about making the world more sustainable and the second is that growth investing did very well over the past decade, and underlying a lot of sustainable investing are growth companies. Cut to 2022 and 2023, not so much. Market volatility with inflation caused there to be substantial outflows of sustainable strategies and there was an oil rally in early 2022 so if you didn’t hold oil you were hurt. However, in its recent Sustainability Disclosure Requirements (SDR) Policy Statement the FCA reported that 81% of adults surveyed said they wanted their money to do good as well as provide financial return, so it seems likely that dissatisfaction with sustainable investing will be a short-term issue.

New technologies, like generative AI this year have contributed to short-termism. The stampede into the Magnificent-7 stocks has meant even though the S&P 500 has had a good year, rising 21.8% YTD, the S&P equal weighted index is only up about 8.2% YTD, showing the narrowness of the market.

Short-termism isn’t good for companies and investors. Warren Buffett has said that bear-markets return stocks to their rightful owners. As long as a company or fund is aligned with its long-term investment objectives, then long-term investors will remain, and short-term investors will be flushed out. We have seen average holding periods come down significantly in the past few decades with investors focused on short-term news instead of the power of compounding. Warren Buffet joined Berkshire Hathaway in 1963 when the average holding period for shares was just under 8 years, while today it is less than 1 year. High frequency trading, electronic trading, increased market access, product innovation, regulatory changes, and the rise of hedge funds are just some of the drivers of this.

But as we see a round-up of predictions for 2024, what about the outlook beyond 2024?

The market shows implied higher long term interest rates, not just into next year, but out to 2034. In the US the market has priced in interest rates at 4%. It also shows inflation priced in at 2%. Both are unlikely to be true at the same time. US inflation numbers come out this week and core inflation is estimated to be 3%. UK and Europe inflation numbers come out next week and are estimated at 5.6% and 4% respectively.

A decade is a long time, and we can all get things wrong, but if we take a view at the longer term, bigger picture view such as this, then it can make things simpler at the very least. If core inflation is starting to look back under control then rates look too high. A number of covid related effects, such as low commodity prices and excess savings have meant the full effects of rates tightening have not been felt, but these trends are starting to unwind.

Covid, Ukraine, Israel, 10% inflation, energy prices, Liz Truss, and an incredibly abrupt rate tightening cycle – the last few years have been a difficult time to invest, which gives us all the more reason to step back from the noise and take a longer term view.

Emily Cave – Trainee Research Analyst

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