Worrying less about the future

Financial Planning & Investments: Charles Stanley Wealth Managers

Looking at the business of investing, the whole exercise is fraught with uncertainty and risk.

Investors have a tendency to look at the negatives, i.e. what could go wrong and how much money could be lost if our worst fears are realised? Whilst this type of analysis should be part of every investor’s armoury, it should not be at the exclusion of looking for potential positive outcomes.

The chart [above] shows the performance of the US equity market and the growth in US corporate profits since World War Two. As the economy grows so do corporate profits and, over the long term, this is reflected in a rising stock market.

Be Positive

Equities do suffer periods of sluggish returns. The 1970’s was a good example with spiralling energy prices, runaway inflation and double-digit interest rates providing strong headwinds for equities.

Despite this, the S&P 500 (including dividends) returned mid to-high single digits in percentage terms on an annual basis. Inflation was high but real returns were positive over the decade.

Elsewhere, the late 1990’s saw the dot-com bubble and 2008 saw the Global Financial Crisis. Recently, we have witnessed the economic and financial market fallout from Covid-19, yet the global economy and corporate profits continued to grow.

Unless you have a material change in your personal circumstances the lesson is to stay invested wherever possible, even if in the short term the news flow appears disheartening.

Planning for the future

Back to the present, with the global stock market trading near all-time highs there are fears that policymakers are in danger of providing excessive stimulus, which could bring back the spectre of inflation for the first time in nearly four decades.

We believe that inflation will rise over the next 6-12 months and that, arguably it has been too low over the last decade, with a rise over the next two to three years welcomed. We expect a circa 25% increase in corporate profits globally over the next year, which could grow even more rapidly should economic growth beat expectations.

Although markets may fret about high inflation in the short term, the longer-term disinflationary forces from demographics and technological advances remain in place; another positive risk for equities is that inflation ultimately turns.

Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority.

Past performance is not a reliable guide to future returns. The value of investments, and any income derived from them, can fall as well as rise. Investors may get back less than originally invested.