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History rarely repeats itself, but it rhymes
By Andrzej Borkowski
There should be nothing special about an individual January to December calendar year when it comes to investing, markets, economics and money. Nor should simply getting to the 31st December each year and then start again afresh on 1st January signify anything. New year’s resolutions and financial markets aside, I doubt many people really begin each calendar year with a blank sheet of paper and no memory of the past 12 months. That said, if we do decide to analyse financial markets in fixed discrete calendar years, then the reality is that you cannot predict what will happen with much accuracy at all.
2022 was a calendar year during which a number of individual things that you could have been expected to happen in isolation at some point over the course of the next few years, all happened together, eg rising inflation, increased market volatility, normalisation of interest rates, a crisis of confidence in the UK government (and add in an un-expected war). War aside, each of these things would be expected to have moderate impacts, but when they occur all together within a short time frame they can quickly change the direction of longer term trends and potentially accelerate the beginning of new trends. Much in the same way that COVID and all that came with it accelerated mass adoption of remote working and the use of video call technology, which had previously been seen as things for the far future.
In terms of markets, the confluence of multiple events all within 2022 led to a rare outlier given that both equities and bonds had negative returns, as did most investible conventional asset classes. From the point of view of a GBP investor, broad commodities and the US dollar were the only two things that were able to generate meaningful positive return.
So what about the article title “History rarely repeats itself, but it rhymes” which most attribute to the American author Mark Twain (although the exact origin it turns out is widely disputed). My interpretation of the quote is that in financial markets at least, no two years are the same, but certain patterns or similarities tend to emerge and come back with some regularity.
Looking back at the past 95 years of US equities markets for example the chance of a positive return in a single calendar year is over 70% of the time, so 3 in every 10 years equities have had a negative return. In addition over half of the time a positive year is followed by another positive year.
The next question may well be do markets typically have more than one negative year in a row, and the short answer is no. Over the last 95 years, a negative year, followed by another negative year has only happened 8 times, so around 9%, and the last time that there were two or more negative years in a row was almost 20 years ago (2000-2002).
So far we are almost two months into 2023 at the time of writing and markets have started off in positive fashion, and more so, the asset classes that fared worse in 2022 (namely equities) are those that are performing the best this year.
2022 also saw the end of the low interest rate era of cheap money, very low inflation and a break in the almost 15 year stretch of interest rates below 1% in the UK. In fact having risen sharply in 2022, UK interest rates are now at a level last seen almost 15 years ago back in the autumn of 2008. Looking forward for investment portfolios, the market falls seen in 2022 and the increase in interest rates have also seen the medium to longer term expected returns for asset classes (5 year to 10 year range) adjusted higher by a number of economists and forecasters. So while the short term in investing is always unpredictable, knowing that we have a better chance of higher longer term returns than we have had in the last few years is a good thing.
Risk Warning: Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.
Important Information: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future performance.