The Half Year Economic Review

This time is different

Investors and economists rely on historical examples of trends and events to predict the future. Reinhart and Rogoffs study of 500 years of financial and economic collapses proved how prone we are to repeating the past. But what happens when there just isn’t a historical example to draw from?

Sure, today’s macro environment has some parallels to the 70’s inflation and oil crisis, as well as the 1920’s and 30’s boom and bust, and even links to the moves of Volcker and Greenspan with their breaking backs and soft landings; but right now, at this half year, we need to appreciate that this time is different. There are glimpses of the past but the macro factors are unlike anything we’ve seen before.

Despite the blurry economic environment I expect the second half of 2022 and early 2023 will trade sideways as inflation, interest rates, earnings, debt, and consumer behaviour play out. Volatility will stay elevated and markets may trend slightly down until we eventually reach a recession in late 2023 and then recover.

Although there’s myriad underlying factors I see two core drivers of the sideways market; liquidity and uncertainty. Due to the nature of people and traders the two drivers are closely linked and inversely related. This means that as uncertainty increases liquidity…