Recessions, Reactions And Negative Interest Rates
The range of market returns – from the asset with the highest return to the asset with the lowest return – determines the potential range of investment returns. Every return comes from someplace in the market, and no legitimate return can exist outside the actual market returns and their amplifiers, such as leverage and derivatives. Investment success can only be relative to market results.
Market returns are in turn dependent on economic conditions, although they can be significantly out of sync with the economy at any particular moment. That is because market returns relate to actual economic facts, such as company earnings and interest rates, as well as the aggregate of investors’ expectations about growth and the future economic climate. That is why investors pay attention to the economy and to economic trends. It is important to have a sense of what is actually happening, what investors as a whole think might happen and the possible actions and reactions of regulators and others charged with “managing” the economy.
Of course, the economy is hard to manage. It is somewhere between a force of nature, like the weather, and the expression of group will, like political sentiment or fashion. While there are objective drivers of the economy, there are also many non-objective factors that are equally important – think of terms like “malaise’, “animal spirits”, “consumer sentiment”, etc. The economy both shapes and responds to human behavior, a notoriously hard thing to regulate, not to mention, understand.