The separation of equity markets and the economy is often misunderstood by many market participants. Conventional wisdom suggests that they should move in tandem, yet the reality does not comply by such a simple explanation. Although short-term movements can align between the two, long-term economic (i.e., GDP) and equity market growth are separate entities that often lead, or lag, one another. This is less prevalent over longer periods and notably more relevant in the medium-term (12-24 months). The economic and market activity of the previous 18-months has provided an anomalous working example of such a relationship and there appears to be a catalyst brewing where we believe a shift may occur. More specifically, the current level, and direction, of global equity markets may be poised for short-term neutrality amidst an economic backdrop that remains poised for growth. This may undoubtedly create confusion but it’s important to note that it fits the mold of historical observations.
Maintaining a long-term perspective is often easier said than done. Short-term economic swings can easily trigger emotions that may force investors to act irrationally in how they interpret forthcoming economic growth or even how they interpret their equity market participation across investment portfolios. The reality of long-term success often stems from initially understanding the current state of the economy alongside a working example of how growth may transpire over the coming decade(s). One thing we can confidently say is that attempting to look through a crystal ball never works, but what does work is the ability to generate a historical perspective as a means of removing investors’ fears and biases about the future. We know, for example, that the COVID-19 pandemic caused a temporary and artificial pause in the U.S. economy’s ability to move near its long-term average growth rate. It was artificial in the sense that it was not an economic downturn caused by underlying systemic issues in the economy, hence why we observed an immediate jump post the trough in 2020. As we look ahead, the secular long-term growth path of the U.S. economy remains favorable for an eventual rise to its historical average growth rate. We believe this to be the case due to the current state of consumer strength, corporate balance sheet health, concentrated fiscal efforts, and an eventual full economic re-opening post COVID. Recoveries of this nature are often doubted by investors for reasons that are often subjective and distorted, which leads many investors to miss the initial stages of the recovery. We urge investors to focus on the long-term and remain objective in their decision making process.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Source: Bloomberg. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Advice offered through CX Institutional, a registered investment advisor.