Geopolitics matter, bonds and equities can move together and market timing is hard. These are all lessons investors can learn from this year, according to Tim Bennett, head of education at Killik & Co.
The past 12 months have been punctuated by geopolitical shocks such as the Hama-Israel conflict, as well as economic volatility, on the back of one of the most aggressive interest rate hiking cycles in history. But with every major event comes lessons that should be learned to make for better investing in the future.
The first insight investors can glean from a turbulent 12 months is that the stock market isn't necessarily the economy.
Indeed, Bennett noted that markets have surprised many by staying afloat during 2023 due to stocks forward-thinking nature, at a time when economies have slowed dramatically.
Prices have remained resilient because investors are looking ahead and “hoping for a respite from interest rate rises and perhaps even a cut in 2024”.
“That is good news for many stocks and investors,” he said.
The second is that, after decades of relatively smooth geopolitics, they “matter again” following rising tensions in the Middle East, as well as the ongoing war in Ukraine and disputes surrounding China.
This "new normal" doesn't necessarily predict a sustained downturn but demands adaptation and flexibility. Building portfolios that can weather these fluctuations will be crucial in the year ahead.
The third insight points towards central bank interest rate rhetoric dictating the trading rhythm. Bennett said: “It is becoming increasingly clear that markets still watch central banks as closely as ever for hints about the future direction of interest rates.”
With inflation showing signs of slowing, further hikes in 2024 are unlikely, and cuts could even materialise later in the year.
Bennett's fourth insight highlights how bonds and shares can sometimes move together as fixed income and equities traditionally move in opposite directions, acting as diversifiers for each other.
However, geopolitical tension, inflation worries, and concerns about US debt disrupted predicted market trends in 2023.
Bennett said: “The good news is that, should inflation now subside, some of the factors that have held bond prices down will fall away, something we have already been seeing towards the end of this year.”
The final insight from Bennett underscores the futility of market timing and the value of a long-term perspective. In the face of uncertainty, remaining calm and adhering to a well-defined strategy will be key to success in 2024.
Bennett said: "In short, trying to time markets is tricky even with foresight, which none of us have in reality. Which means we shouldn't bother trying."