All investors are like Winnie the Pooh – they just want honey (in this case returns) and they don’t typically care where it comes from. But, at present the world seems to be split into two buckets: the Tiggers and the Eeyores.
The era of AI has masked a multitude of equity market sins over the past few years, with investors enjoying good times despite a wall of worry in the background.
Wars across the world, political instability in some of the world’s largest countries and an end to globalisation should have caused more of a panic than they really have.
While there have been short-term blips, such as the market falls following Donald Trump’s ‘Liberation Day’ last year and again following the outbreak of the US/Israel-Iran conflict, these have been very much short-lived.
The MSCI World index has risen more than 60% over the past three years – call it 20% per annum. Those sorts of returns are extraordinary given the context above.
Equity investors are typically more bullish, believing that markets will continue to rise forever and that stocks can only make money.
Think of them like Tigger. They might drop suddenly but seem to have springs in their feet, bouncing back up pretty quickly.
Over in the world of bonds, things are very different. Fixed-income investors tend to be far more bearish than their equity counterparts. But there is good reason for this, according to PGIM co-CIO of fixed income Greg Peters, who explained bond investors tend to worry more because the best-case scenario is that they receive their coupons and get their money back at the end of the bond.
They have much more limited upside, so the negative effects are far more impactful, which explains their drearier outlook.
In this respect, they are more akin to Eeyore, constantly wondering what might go wrong and preparing for a worst-case scenario that is always seemingly around the corner.
And this has been the case over the past year or so. While equity markets have been buoyant, bonds have stagnated (or in some cases even slumped).
This is because “bond markets are focused on macro issues, while equity markets are focused on the micro (or fundamentals)", said Peters.
Equity investors are myopically focused on the Magnificent Seven stocks of Apple, Amazon, Alphabet, Microsoft, Meta, Nvidia and Tesla. If these perform well, so does the market.
Bond investors are more interested in how global macroeconomic factors will impact economies and inflation, which will in turn affect central bank interest rate policy and, ultimately, the price of the bonds they are buying.
So which is right? Unsurprisingly, Peters thinks the bond market is right – although he is a fixed income expert and therefore perhaps more naturally bearish.
For what it’s worth, I think bond markets are right too. I was only 16 during the 2008 financial crisis and had no knowledge of markets, so I have never truly seen what the end of a market cycle looks like before a collapse.
While there have been some in recent years – in particular Covid and the bear market of 2022 – most agree these haven’t been truly cycle-ending events.
But it feels like we are nearing it now, with markets desperately awaiting blockbuster results from a few names to keep the good times going a little longer.
Perhaps rather than behaving like Tigger or Eeyore, we should aim to be more like Piglet – always nervous but occasionally brave. For the past few years it has paid to be brave, but as markets keep rising and the range of outcomes required for the good times to keep going becomes smaller, we should all be getting more and more nervous.
Jonathan Jones is editor of Trustnet. The views expressed above should not be taken as investment advice.