With so much bad news out there in the world for investors to worry about there’s one key element that has been strangely missing so far. Sure, there is some good news which I’ve highlighted below, but there’s nothing in there that’s really driving share markets. What is missing, despite all the bad news, from geopolitical tensions escalating to deteriorating economic data, is the absence of the bad new turning into an ugly financial or economic crisis. That is what is really kept markets from falling. There have been a few times where issues have bubbled to the surface, such as the mini banking crisis in the US in March this year, and the UK bond & pension fund crisis in September 2022, but these incidents so far have been managed and curtailed before they escalate.
Some of the good economic and investor news out there is that:
Inflation rates across much of the world have fallen reasonably quickly from their peak.
Unemployment has remained low signalling a robust economy.
Home prices have been resilient on the back of a supply shortage.
AI and mega tech continue to grow.
You can now get a solid yield on government bonds and term deposits of around 5%
US GDP unexpectedly high in Q3 at 4.9%
I’d like to say that this list is not exhaustive, but I can’t really think of anything else.
But by all means please let me know if I am missing anything.
The list of bad or concerning news is longer and more serious:
Interest rates are looking like they will be higher for longer.
Volatility in the price of oil.
Consumer spending is slowing.
Bond losses mounting at banks, pensions funds and other institutions.
The Ukraine war is nowhere near resolved.
Middle East tensions rising and the risk they escalate and spread.
China and Taiwan risk.
China and tensions with the US and Australia.
UK inflation is still at 6.7% with rates trending higher.
Risk of fragmentation in Europe as interest rates increase.
Energy shortage in Europe.
Japan moving away from yield curve control on their bonds.
US Federal Government runs out of money every couple of months.
US Federal Government’s annual budget deficit is around USD $2 trillion pa.
US Federal Government’s debt is now over USD $33 trillion.
Mortgage stress in Australia with 30% in distress according to Roy Morgan report.
US mortgage rates hit 7.5% for the first time since Nov 2000.
Rising insolvencies and bankruptcies at the highest levels since 2010.
Retail sector seeing significant declines.
Office property sector struggling with vacancies and higher debt costs.
Corporate debt cliff as company’s refinance at significantly higher rates.
China’s economy struggling with massive debts and property losses.
Corporate earnings forecasts too high and may be revised downward.
There are two main concerns with the above list. Firstly, just the sheer number of areas that are currently problematic and heading the wrong way. Secondly, the real issue is that any one of the 20 plus items on this list can escalate into a genuine crisis. What has kept investors complacent and share markets resilient is that while there is a lot of bad news out there not much of it if any has morphed into an ugly crisis situation from an investor or share market perspective.
I don’t believe that can continue in 2024. I think investors and share markets especially are underestimating the risks that exist in the global economy. The risk that any of these precariously placed bad new events deteriorate and become a major problems that compound other areas and lead to contagion. What’s more there is the ever-present threat of a black swan event, an event no one predicts, eventuating that shocks the system. The global economy has very little room to move now.
For long term portfolio investors, many of these issues are related and link back to interest rates being higher for longer. Its critical to understand the massive implications this is having on the global economy now and into 2024. Understand the potential risks so you make decisions regarding asset allocation as required and so you are able to take advantage of the opportunities ahead as the cycle progresses.
General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.