Just when you think that markets can’t keep going up, they keep going up. The third quarter of 2024 was another impressive display of what diversified, prudent investing can achieve. Both stocks and bonds rose during the quarter and elevated one-year returns solidly into double-digit territory. Every single Justwealth portfolio (and there are more than 80 of them) is up more than 10% over the past year, even the most conservative options. It does not get much better than this in the investing world.
Investors can thank central banks across the world for their good fortune. The money-printing euphoria that transpired during the onset of the COVID-19 crisis averted what could have been a catastrophic global economic collapse. A gradual return to ‘normal’, however, eventually resulted in the prices of goods and services escalating to chaotic levels, prompting central banks to emphasize slowing down demand for a couple of years. In 2024, it became clear that inflation was again back under control, and central banks managed to accomplish their goal of price stability without any major economic disasters!
The chart below illustrates the expansion of the M2 definition of the money supply for the United States. The unprecedented rise in 2020 eventually flattened out, but the absolute level is still abnormally high. Basic economic principles would dictate that if the supply of “goods” is fixed but the amount of money available is increased, then prices should go up to bring supply and demand back into equilibrium (if everything else remains constant). “Stocks” can be substituted in place of goods and the same principle would apply. So, the red-hot returns in the stock market may be nothing more than a function of increased money supply. This would imply that a near-term correction is not necessarily imminent, and in fact, markets may currently be under-priced based on this one variable.
Of course, investing is much more complicated than that, and shorter-term events are very often driven by investor psychology, which has proven time and time again to be irrational. Attempting to predict short-term market events is a fool’s game – nobody can predict irrational behaviour! As we have pointed out many times before, longer-term returns are much more stable. In the long run, we believe that the market is rational, and thus more predictable.
Bond prices tend to be less “emotional”. Almost all bonds have a finite lifetime with well-defined mathematical formulas to determine prices. Furthermore, the return of most bonds can be 100% accurately predicted for their lifetime (or maturity). The only uncertainty is the path that a bond’s price will take between issuance and maturity. Coincidentally, what that implies is that bond returns are not predictable in the short run, but very predictable in the long run. Notice the pattern?
We are constantly asked our opinion about what is going to happen in markets in the near term: Are markets overvalued? What will happen based on the upcoming election? Will geo-political events affect the markets? Is a recession inevitable?, and so on. The truth is we don’t know, nor does anybody else even if they believe and argue that they do. We are far more comfortable addressing longer-term market prospects, and getting inflation under control reduces a major risk factor for the long-term prosperity of both bond and stock markets.
Here is a recap of market performance as of September 30, 2024*
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