Beware extrapolation - it's a familiar message
THE message of this week should be a familiar one – beware extrapolation. The instinct to make more of incoming news flow, to weave it into a wider narrative thread, is perhaps particularly understandable at the moment.
A more captive than usual audience naturally needs the torrent of daily news flow to fit some discernible pattern. It can't just be one pattern either of course – the demands of our particular echo chambers are usually pretty distinct, whether defined by nationality, political creed, or some other tribal cause.
A year ago, stock markets bottomed after a stomach churningly sharp decent. As usual, this was not an obvious turning point at the time. Most commentators were rightly predicting that the worst was still ahead for the economy. Some were vividly (and plausibly) describing a rapid descent into dystopia characterised by bank runs, widespread social unrest, and economic depression.
However, market prices had already incorporated the bleaker outlooks into their range of expected outcomes and maybe even exaggerated their likelihood. As a result, when the path ahead turned out to be bad, but a little less bad than already assumed, stocks, risky credit and other economically-sensitive assets embarked on a dizzying rally that has barely paused for breath since.
Most are now pretty positive on the outlook for the world economy. Rightly so. There are risks, both seen and unseen (as always). Nonetheless, the muscular support of policy makers combined with the miracles of modern science should see the world economy continue to accelerate in coming quarters. Remember though, this is now broadly known and incorporated into market prices. Those buying into stock markets and wider risky assets to immediately participate in this expected growth boom will likely be disappointed.
The reason to buy into (or remain bought into) a diversified basket of capital markets now is never about what may or may not happen in the next 6-12 months. It is simpler than that, as we've pointed out before. It is the future beyond the horizon of your news feeds that you are accessing, one characterised by the likely multitude of jaw-dropping technological breakthroughs we cannot yet know about from our current vantage point.
Many of these breakthroughs will not come from the corners we currently expect either. Few can have foreseen the technological ripples created by Dmitry Mendeleyev's invention of the periodic table in 1864. Even in hindsight, the role of Mendeleyev's breakthrough in the productivity surges of the 1920s is obscured by the electrification story.
For the modern day equivalent, maybe it will not be artificial intelligence that fuels the productive advances of the decades ahead of us. History teaches us not to underestimate the potential of the seemingly more prosaic, less newsworthy innovation in terms of its effect on society and wider economic growth.
Away from the traditional rant on productivity, it is also worth applying this lens to the news of today. Much of the current flow of opinion pieces aims to make something more out of the relative successes and failures of vaccine distribution around the world. There are surely lessons to be learnt. However, it is also worth remembering that a year ago, the talking heads were prospecting for meaning in the huge differences in case counts and economic outcomes seen around the world at the time.
Then it was the UK that compared unfavourably. Then, as now, we would warn of the desire to derive lessons and judgments prematurely. This pandemic has certainly exposed the strengths and weaknesses in the broader design of many countries – from societal to institutional. However, we will need time to distinguish between the role of luck (good and bad) and design flaw (to the extent such things can be said to be a function of design).
Remembering that history is messier and more reluctant to conform to one or other narrative than our echo chambers would require is important. The views of our tribe and our chosen media feeds can be reassuring – safety in numbers if you will. However, for those thinking about investment we would recommend a broader perspective. If the present and recent past can tell us much less than we might want about that future over the immediate horizon, then a diversified approach is surely the only sensible option.
:: Cahir Gilheaney is a wealth manager with Barclays Wealth & Investment Management team in Belfast.