Letter From The Editor: War, Inflation and Uncertainty. So Why Are Markets Still Climbing?

Barely a day seems to go by without there being yet another reason to worry about the economy and our finances. The US remains at war with Iran, the Strait of Hormuz is still closed and, at home, we’re all still being squeezed by a cost-of-living crisis that refuses to let up.

And yet, in spite of all this, major stock indices have been reaching record highs.

On July 31st, the FTSE 100 reached an all-time high. It’s a similar story in the US, where the S&P 500 also recently recorded a new all-time high.

So what’s going on?

The simple answer is that stock markets aren’t simply a measure of how confident people feel about the world today.

Share prices reflect what investors think companies will be worth in the future and their sentiment around the long-term outlook for a situation, sector or company.

While geopolitical uncertainty and higher energy prices can hurt businesses and consumers in the short-term, investors are also looking at corporate earnings, interest rates, valuations and the prospects for economic growth over the long-term.

That’s why markets can sometimes rise even when the news feels terrible – and fall when things seem relatively calm.

It’s also worth remembering that the FTSE 100 isn’t a perfect reflection of the UK economy. Many of the companies in the index generate a large proportion of their revenues overseas, while sectors such as energy and mining have a particularly big influence on the index.

What does this mean if you’re an ordinary investor?

Perhaps the most important lesson is that trying to make investment decisions based on the news is incredibly difficult – and unnecessarily risky.

Historically, if you’d sold your investments every time the world experienced a shock, you could have missed some of the strongest periods of market growth when stocks rebounded.

Equally, a market reaching record highs at a time when things seem overwhelmingly positive, doesn’t mean it can’t fall tomorrow.

That’s why it’s important to understand the fundamental principles of ‘Evidence-Based Investing’ (EBI) – a disciplined approach that is grounded in academic research and historical market data rather than emotion or speculation:

• Build a diversified portfolio, so you are spreading risk and not ‘keeping all your eggs in one basket’
• Invest for the long term
• Minimise those investing costs you can control – platform fees, FX fees, and subscription fees
• Avoid knee-jerk reactions: history suggests that time in the market beats trying to ‘time the market’

And:

• Accept that markets will sometimes move in ways that seem completely at odds with the headlines.

We can’t know what markets will do next. But we can control how much risk we’re taking, how diversified our investments are, how much we’re paying to invest, and whether we’re investing in a way that matches our goals and time horizon.

The current environment is a useful reminder that uncertainty is not the same thing as a reason to stop investing. Historically, long-term investors who have followed these principles, haven’t needed to have the ability to see into the future and predict the next geopolitical crisis, interest-rate decision or market move to be a successful.