After a brief squall last week, markets have settled back into their commentator-unfriendly malaise. To put some colour on that, global equities blinked to the tune of -0.04% over the week, while UK equities suffered a light wilt of -0.14%. As a rule of thumb, you’ll know not much has happened when I resort to two decimal places.
These numbers were despite dramatic inflation news in both the UK (a rise to 2.5%) and the US (lifted to 5.4%) – both hitting multi-year highs, and both higher than economists expected.
Another peep behind the curtain of financial commentating: watch out for the word “despite”. As in “markets fell despite good news on unemployment”. This means we, the commentariat, have caught a piece of real-world news and thought “Thank heavens! Surely that gives me something to write about!”. Only for the market to then either completely ignore it or do the stone-cold opposite of what we thought it should.
That fully applies this week. Given the efforts I’ve made to emphasise the importance of the direction of future inflation, you’d think news like this would send shockwaves through markets. Or, at the very least, cause assets that hate higher inflation, such as longer-maturity bonds, to sell off. And yet they didn’t – they actually rose as the news hit midweek.
Of all the many bewildering features of financial markets, this frequent disconnect between news and market reaction is perhaps the Queen of Bewilderers. Why does it happen?
There are lots of reasons. The chief one is that markets anticipate events well before individual commentator’s cotton onto them. This almost mythical ability to see into the future has been dubbed “The Wisdom of Crowds”. That crowds can be wise will be news to many of us, particularly after Sunday night, but there’s plenty of evidence showing that, in this respect at least, they can be. This means markets may have already anticipated, and therefore reacted to, this uptick in inflation several months back. Hence the insouciant shrug this week.
Another is that markets quickly look beyond the event itself, and instead react to the reaction to that event. Or even to the reaction to the reaction. (Picture yourself standing in front of a mirror, holding a different mirror, for a visual representation of this.) So the fact that inflation is higher than expected may mean that, instead of worrying about inflation, investors are fretting about central banks overreacting to that data, and prematurely squashing inflation (and economic growth with it) before it gets going.
Complex, isn’t it? It would be boring if it wasn’t though. It’s why we love our jobs: there’s always something happening, and tweaks to be made to portfolios.
Have a great weekend,
Simon Evan-Cook
(On Behalf of Raymond James Barbican)
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.