I’ve recently added a new chapter to my long-running demographics journal, which I will present in more detail later this month. Before I get to that, I thought that I would have a look at my own financial performance in 2021. In preview, I did ok, but not as well as the market. My portfolio, split across two accounts at AJ Bell and Nordea, returned 6.6% in 2021, when adjusted for a significant zero-return cash position, and around 10% on its own. I am embarrassed to say that I dropped the ball on the month-to-date PnL calculations throughout the year to a larger extent than usual, so these numbers are a bit a uncertain. They are, in any case, far from the show-stopping returns of the MSCI World equity, index at just over 21%, let alone the performance of the mighty S&P 500, at 27%. My first two charts plot the top and bottom 10 performers, which is as good a basis as any to talk about markets.
Read MoreIt’s been ages since I checked in on markets, but I am a happy, and a little dismayed, to report that investors and analysts are trampling around in the same weeds. Is inflation transitory or not? Will supply-side disruptions persist? And what about fiscal and monetary policy; will one loosen and the other tighten? In fairness, we have seen a shift in the economic outlook, for the worse. The reopening bump in economic activity, as virus restrictions were eased, is over, leaving economists to ponder what pace of growth to expect as the pandemic-induced macro volatility recedes. This moment was always coming, but almost on cue, we now have to contend with a litany of downside risks in the form of a real-income sapping rise in energy prices and a real estate crunch in China. These headwinds haven’t put much of a dent in risk assets, yet. The MSCI World and S&P 500 are down a paltry 1.5% and 2.5% from their highs at the start of September, respectively, and are still holding on to handsome year–to-date gains, 14.7% and 18.9%, respectively.
Read MoreLast week I said that investors have plenty to worry about, but also that many of the traditional reasons to abandon ship—chiefly extended valuations and political paralysis and risk—perhaps weren't as valid as many think they are. The most convincing argument for not panicking despite extended valuations is that ample global liquidity and low interest rates remain as support for equities and credit markets. I imagine that his idea has been put down on page one of most investors' playbook since the financial crisis. The argument is pretty simple. As long as central banks are on the bid, their purchases of bonds—and other assets—will drive private investors into riskier markets. Known as the portfolio balancing effect, this is recognised to operate via both the stock and flow of central banks' balance sheets. Finally, front-end interest rates that are locked at the zero bound—or slow to rise even as the economy recovers—also translates into higher equity prices and tighter spreads. Low rates mean an increase in the future discounted value of cash flows and also encourages investors to pay a higher multiple for the same level of earnings. It also forces investors to seek out yield in private debt markets to reach their return targets, despite the higher risk profile of corporate bonds.
Read MoreWeaker oil prices, a Fed rate hike, and Geert Wilders' anti-EU party swooping in as the second-biggest party in the Dutch parliamentary elections. You would have thought that these events last week would have been enough to scare investors. But headlines can be deceiving. Despite the weakness in oil, the price hit strong resistance at its 200dma, and snapped back in the latter part of last week. The tone of Mrs. Yellen's statement was just right to maintain markets' faith that the Fed will only gently push borrowing costs higher. In other words, risks assets wanted a dovish hike and decided that this is what they got. And finally, the key story in the Dutch elections was not that Mr. Wilders made headway.
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