Equities, Bonds, and the Pursuit of a 'Goldilocks' Scenario

Spotlight: Time in the market, not timing the market

A popular adage goes, "Time in the market, not timing the market." It highlights the ideal scenario of entering the market at the right moment. However, predicting this perfect timing is impossible since no one has a crystal ball. The risk lies in the potential for wrong predictions, resulting in missed opportunities for significant investment growth. Take 2020 as a prime example. The onset of the COVID-19 pandemic brought unforeseen challenges. Despite this uncertainty, the MSCI World Index surged by 16.5% that year. Few would have accurately foreseen such growth amidst the pandemic. What we do know from history is that financial markets are able to rebound from market downturns and therefore “time in the market” may pay-off over the long-term.
 
2023 saw the Bank of England, and other global central banks, increasing policy rates (rates that indicate the cost of borrowing money) in order to decrease aggregate spending and combat high inflation. Most of the UK population will have felt the impact of rising inflation leading to the cost of living crisis, which has meant that the prices of goods are rising quicker than usual and the purchasing power of cash is eroding over time at a faster pace. On the other hand, the rising central bank policy rates have had a positive impact on savings rates for consumers, thus earning investors more on cash savings than we have seen in recent history. This begs the question of whether to bother investing money in markets or whether to hold cash in a savings vehicle instead. In September, the Bank of England decided to halt the base interest rate, marking the first pause in nearly two years. This move created an anticipation that the interest rate might have reached its peak and could potentially decrease in 2024. These expectations have already impacted the fixed-rate savings market and consequently, many fixed rates have started decreasing, marking the first decline in nearly two years. The Bank of England expects inflation to continue falling in 2024 and expects it will reach its target of 2.5% towards the end of 2025. Should this materialise, these recent higher savings rates may not be around for much longer.
 
In general, over the medium-long term, assets tend to outperform cash even if the return on cash is, say 5% not 0% for example.  Over shorter time periods, assets may underperform cash but it is extremely difficult to “time the market” with a high degree of confidence. Of course there are other factors to also consider such as the investor’s time horizon, attitude to risk and capacity for loss before deciding the most appropriate way to invest.

The Noise

• In the initial days of 2024, stock markets experienced a turbulent beginning, with major indexes facing a decline. Proponents of the January Barometer, who rely on the belief that the market's performance in the first month sets the tone for the year, are hoping for a turnaround. Notably, the S&P 500 has witnessed a 1.7% drop, marking its poorest start since 2016. The Dow Jones Industrial Average is down by 0.7%, and the Nasdaq Composite has experienced a more significant decline of 3.3%. The market's retreat follows a robust conclusion to 2023, leaving investors attentive to the potential implications of this early-year volatility and hopeful for a reversal in the coming weeks.

• Despite a general stock market decline, pharmaceutical stocks had a good week with investors looking towards its relative resilience. Eli Lilly, a standout from the previous year, saw a nearly 4% surge, joined by positive movements in Dow Jones components Amgen and Merck. UnitedHealth Group, Cardinal Health, and McKesson also recorded gains in the healthcare sector. Novo Nordisk, renowned for the obesity treatment drug Wegovy, signed research agreements with Flagship Pioneering-backed biotechs, committing up to $1.1 billion for innovative technologies targeting weight-related diseases. Amidst the broader market downturn, these notable advancements in the healthcare and pharmaceutical industry are garnering attention, showcasing the sector's relative strength.

• A landmark climate case, initiated by 21 young individuals, has been granted permission to proceed to trial by a federal judge in Oregon. Judge Ann L. Aiken of the US District Court for the District of Oregon rejected the government's attempt to dismiss the case, emphasizing the fundamental right to a climate system supporting human life. Since 2015, the litigation contends that the government's reliance on fossil fuels violates constitutional rights to a stable climate. Despite facing multiple appeals, including through the US Supreme Court, on procedural grounds, Aiken dismissed the government's argument that addressing the climate crisis is too complex for judicial redress. The case marks a significant step toward a trial, allowing scrutiny of the federal government's fossil fuel energy policies in light of the plaintiffs' constitutional rights. In a related development, a Montana state judge previously ruled the state's neglect of considering climate change in approving fossil fuel projects as unconstitutional in August 2023.
   

​The Numbers

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The Nuance

In 2023, inflation dominated discussions among investors, raising concerns about the erosion of asset values. The prevailing market narrative revolved around the idea that any negative economic news would be favourable for markets, as it could potentially mitigate high inflation. Consequently, the year witnessed the most rapid policy rate hikes in the US and Developed Markets in four decades, resulting in tight monetary policies with restrictive real rates and yields.

Equities experienced a strong performance in 2023. The "Magnificent Seven," referring to US mega-cap technology stocks, significantly contributed to this success, particularly in the first half of the year amid optimism about the future impact of Artificial Intelligence. Positive sentiment towards the end of the year was fuelled by economic data signalling a slowdown in inflation and robust economic growth, especially in the US. Investors began pricing in a "goldilocks" soft landing scenario, anticipating central banks' success in reducing inflation without adversely affecting economic growth.

In the bond market, yields started the year at significantly higher levels than the previous decade. Despite the high starting yields, bonds delivered strong absolute returns. The Global Investment-Grade Index outperformed government bonds. High yield and emerging market debt also outperformed, benefiting from narrowing credit spreads, higher initial yields, and a lack of material defaults and downgrades.

Listed infrastructure and real estate (REITs) struggled compared to broader equity markets. These rate-sensitive assets faced challenges due to higher interest rates, impacting borrowing costs for property financing arrangements. Additionally, the absence of investments in the "Magnificent Seven" and concerns about funding sustainability, especially with smaller regional banks in light of the Silicon Valley Bank saga, contributed to subdued performance over the year.

In foreign exchange markets, GBP strengthened significantly against the USD throughout 2023. Investors believed that higher interest rates in the UK, compared to the US, would persist, making holding GBP more attractive. Currency hedging strategies for overseas FX exposure proved beneficial for investors throughout the year.


 

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.