Forward Looking Markets
Key Takeaways
Data suggests that markets anticipate future economic growth and reflect those circumstances and conditions in current market prices.
Investing based on today’s news can almost be a year (or more) too late.
When plotting the GDP growth against the previous year’s equity premium (the return you get for taking on stock market risk), we see a positive trend in the data. This suggests that on aggregate investors all around the world anticipate future economic growth and reflect this in current market prices through their buying and selling activity.
The global stock market index was down -19% in 2022, reflecting a bleak expectation of the future, namely a slowdown in 2023 and possibly further. Would this continue in 2023? Probably not and quite often, we see markets rise and recover as economic data continue to deteriorate, confounding many investors.
Despite the ongoing banking crisis, the threat of nuclear escalation in the Ukraine conflict and stubbornly high inflation, the stock market is still positive this year. This suggests that the current bad news is not fazing investors and on aggregate, they could be pricing an improvement in conditions in the future.
If you are buying on today’s news, you are too late. Markets have already discounted the future. What about trying to forecast markets? Research has shown that it is extremely difficult and even the professionals fail to do it. It is better to invest for the specific goals you have in mind, and to plan for a range of outcomes - both good and bad to cater for the myriad of scenarios which could befall you in the future.
We do not need to rely on being right with forecasts to generate returns. If you would like to find out how you can grow your assets in a stress-free and predictable way, click here to schedule a chat with us. (Our 30-minutes exploratory meeting is complimentary - either Zoom or In-Person)