In summary
Why should I invest now?
Why not wait for a pullback in stocks? Or when the world is less indebted/old/terminally screwed? Below we consider a couple of the most pressing concerns getting in the way of good long term investment decisions.
Perpetual forecasts of imminent recession…
Fears of an imminent recession are a common impediment for investors – what happens if I invest all my hard-earned savings in the market today and tomorrow we see a recession and a bear market? As a result, a huge amount of the industry effort is expended on trying to predict recessions and bear markets. In hindsight, much of that effort is wasted. If there were a way of reliably predicting recessions, then they probably wouldn’t happen – it wouldn’t just be investors dodging the consequences, but companies and governments too.
Many talking heads, lured by the asymmetric reputational boost, will opt for the stopped clock tactic. If you are always doing the rounds speaking of what could go wrong, you will be right at some stage, and your personal stock will briefly soar – temporarily appearing one-eyed in the land of the blind. The more years the economy expands without catastrophe, the more these dogged doomers warm to their theme. However, the probability of a recession occurring tends to be independent of the length of the cycle. Economic expansions do not die of old age. If you take this one step further, it means you can probably afford to dismiss most attempts to classify an economic cycle’s ‘age’ or proximity to recession based on similarly stylised frameworks.
Happily, in spite of what many will understandably imagine, recessions have actually been getting significantly less frequent and less severe over time. Prior to 1700, the British economy (for example) contracted as much and as often as it expanded. The result was no discernible net progress in living standards over centuries. Since then, the ratio of expansion to contraction has improved to roughly two to one. Since 1900, the economy has managed even better, with recessions only 17% of the time.
There are many reasons why we and the wider world have been getting better at dodging these salvos. One broad category of answers centres around the emergence of the specific types of institutions. Under this umbrella, we are talking about everything from parliaments, judiciaries and central banks to trade unions, guilds and charities. The important point for our purposes is that these institutions, both formal and informal, ultimately evolved to ever more successfully help us both protect economic gains and mitigate the nasties.
There are other factors to consider too. As more cyclically sensitive manufacturing companies dwindle as a share of total output, replaced by less cyclical services businesses, the economy in aggregate treads a steadier path. Even within manufacturing, greater proportions of the revenue and profit base have become more service-like – British manufacturing firm Rolls Royce now derives two-thirds of its revenues from servicing activity after the sale of its engines for example. The growth of the intangible, mass-less economy has important implications for the economic cycle on its own. Intangibles have no inventory or need of a stock room and, until very recently, many of the businesses involved in this sector of the economy didn’t need to borrow to fund capital expenditure.
As a result of all of this we can happily now say that at any period in time, the global economy is much more likely to grow than not. Technological innovation, the growing dominance of services, allied to those buffering institutions are all important cogs. Therefore, over time, growth tends to far outweigh the negative shocks from a recession. The same story holds for equity markets, since the profits that drive returns are themselves a direct function of growth.
All-time highs and valuations
In a similar vein, all-time highs in stock markets tend to give us financial markets’ equivalent of vertigo. We struggle to suppress the sense that a juddering return to the ground, wherever that may be, is a step closer – what goes up, must come down? The idea of putting one’s hard earned money to work in an index (price or total return) that sits at all-time highs is surely counterintuitive, a perversion of the time honoured advice to ‘buy low, sell high’?
However, the fact that ‘the ground’, represented by corporate profits for stock markets, tends to rise over time, provides a forgiving context for investors. As the world economy grows, so too do corporate profits. The relationship between the two is not as precise as forecasters would like, but there is no fixed limit for either. Of course, we can never know that the world will continue to grow in the future. As such, investing is always a leap of faith, based in large part on a careful assessment of the trends of the past.
But what of the price we have to currently pay for owning a share of those profits? Unfortunately, here too there are no clean answers. The problem here is one of context and perspective. How much history do I need to place today’s valuations in appropriate context, or what history in particular? We will cover some of the of techniques and frameworks we use to assess value in future articles. For now, suffice it to say, that in aggregate stock markets are not demandingly valued. The pockets of exuberance are so far mostly offset by the areas of more inviting valuation at the summary level.
Investment conclusion
The bumps in the road ahead are unlikely to be predicted ahead of time. Most of the time, investing is about making the most of the good times, so that you have some cushion for the inevitable dips. Diversification across asset classes and regions certainly helps smooth the journey. Our team here have also done a good job of being selective within the various asset classes and regions, in large part aiming to leave the exuberance to others. The key is to stick with it to whatever extent possible.
1. Glenn D. Rudebusch, 2016. “Will the economic recovery die of old age?,” FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
2. Stephen Broadberry & John Joseph Wallis, (2017). “Growing, Shrinking, and Long Run Economic Performance: Historical Perspectives on Economic Development,” NBER Working Papers 23343, National Bureau of Economic Research, Inc.
3. The UK’s Productivity Problem: Hub No Spokes – speech by Andy Haldane | Bank of England
4. Coyle, Diane (2025); The measure of progress – counting what really matters – Princeton University Press
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References
Source: https://www.brooksmacdonald.com/insights/why-invest-now
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