3 lessons from 2024

“Nod as I'm speaking to you. People are looking to me for reassurance and I have no idea what's going on.” (Georgy Malenkov – The Death of Stalin)

Time wasted watching central banks

As an industry, we devote an inordinate amount of time to discussing the outlook for central bank policy. This is perhaps not too surprising. Central banks have profound, albeit routinely exaggerated, influence over interest rates. Perhaps because of this influence, and the privileged view of the economic outlook these monetary rock stars are assumed to enjoy, their words carry a heavy weight in markets.

There is now an industry within an industry minutely dissecting their every utterance, desperately trying to glean an edge over the competition on various aspects of the investment opportunity. The problems are several-fold.

First, central bankers are aware of the investor scrutiny and even welcome it as a means of exerting extra influence over the path of interest rates – their communications are painstakingly shaped accordingly. However, investors are, in turn, well aware of the attempts to influence them. This creates an ultimately deleterious hall of mirrors effect, characterised by much noise and very little actual signal.

Second, central bankers are mostly as blind to the vagaries of the future as the rest of us. Of course they are. There is no viewing platform exclusively reserved for them, from which they can glimpse more of the future than the rest of us.

This is not to suggest that central banks are not populated with hard working, very clever, and well-intentioned individuals. They mostly are. However, this was another year which proved how little extra foresight they are blessed with (Figure 1).

Figure 1: The market is not very good at forecasting Fed rate decisions

Source: Bloomberg, Barclays

Investors and normal human beings can save themselves a lot of time. Trends in interest rates are mostly driven by factors well beyond the reach of the central banks. In fact, over longer periods of time, even prevailing economic theory does a poor job¹ of explaining the tendencies of real and nominal interest rates.²

Our hunch remains that the basement level interest rates seen for much of the period since the Great Financial Crisis (GFC) are the anomaly. We would expect further interest rate cuts across the developed world in the quarters ahead, but see them levelling out higher than in that quite unique period running up to the pandemic. In part, this might reflect a higher trend in real and nominal GDP growth as the industrial revolution takes hold.

This will have plenty of implications of course, some predictable, many less so. This is yet another area where we think you would be unwise to anchor to the return profiles of the last economic cycle. We are simply not in the same world.³

Politics, geopolitics, and technology

The doomers must have been licking their lips at the prospect of 2024. The return of President Trump lay tantalisingly at the end of a veritable banquet of precarious elections. Dispassionate analysis was buried under mounds of sensationalism in the escalating fight for our flitting attention.

The reality is that there was and is much to worry about. We are surely in a moment, a kink in our times. The geopolitical soothsayers sadly have plenty of material to terrify us with. More prosaically, President-elect Trump could upset bond markets in a more globally significant replay of the ‘Trussnado’ that briefly upset gilts in 2022.

Meanwhile, Europe is still wrestling with its own populist insurgency amidst still stagnant growth and worsening external economic threats.

However, the point for investors to note in amongst all of this sound, fury, and bad dinner party chat was that the economy, particularly in the US, is capable of ploughing its own path. Various factors, including the march of the technological frontier, were simply much more important for investors to spend time analysing above the evolving tragedies in the Middle East, Africa and Eastern Europe or indeed the various campaigns and election results the world over.

The world’s political leaders cannot be caricatured as puppeteers taking over the strings attached to various parts of their economic charges. The next group of leaders taking office at the moment may simply be a bit luckier than their immediate predecessors.

Where their predecessors wrestled with the aftermath of a giant financial crisis and a quiet patch for technological change, the current crop may enjoy more of a tailwind from an industrial revolution more visibly taking hold. This is mostly a function of a maturing opportunity from the advances in the technological frontier this last few years.

Diversification can be (emotionally) painful

2024 offered a masterclass in the emotional challenges of diversification. Global equities surged more than 20% (Bloomberg, as of 11 December 2024), pockets of the equity market offered a significant pick-up from this, and anyone who owned bitcoin at the start of the year would have more than doubled their money.

Of course, past performance is no indicator of future performance. Yet, by comparison, diversified multi-asset portfolios probably felt like they were dragging a parachute, despite having a solid year.

In such years, the pain of diversification isn’t just mathematical – its deeply psychological. FOMO isn’t just an analogy; it’s a genuine emotional burden that can impact even the most disciplined investors.

We are certainly not suggesting abandoning diversification. Quite the opposite – we thought it worth reminding investors why diversification is important and acknowledging the behavioural challenges that come with it.

First, diversification requires holding assets, that by design, underperform during periods of concentrated market (or asset) strength. This creates a cognitive strain as media outlets celebrate new market highs or play hindsight bias with stocks which substantially outperformed – all in the name of prudence.

Second, the social aspect cannot be ignored. There is an entire industry built around celebrating concentrated success, with financial media amplifying stories of spectacular returns. More often than not, they also ignore the (lack of) risk management to achieve these returns.

And needless to say, we don’t hear about those who destroy wealth through concentration. Diversified investors aren’t just trying to weather market volatility, but the encore of anecdotes about fortunes being made through concentration.

Most people understand the concept of diversification, but sticking with it isn’t something that can be learnt in a textbook. It has to be lived. For anyone investing through 2022, (briefly!) revisiting the psychological impact of that year will likely be a quick reminder of why diversification makes sense.

And remember, if diversification didn’t hurt during periods of concentrated outperformance, it probably wouldn’t offer meaningful benefits when markets inevitably shift.

Conclusion

These are obviously not the only lessons to be learnt this year. Markets are always teaching us humility for one thing and there was certainly plenty of that lesson to go around this year. However, these three are likely to be helpful for us all to remember as we go into 2025.

This publication now takes a break and will resume in the week of 6 January 2025. As always, this issue comes with the team’s best wishes for the festive period.

Appendix : Discrete annual returns (GBP, %)

Source: Bloomberg, Barclays