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Kris Wrenn

Is the Economic Clock​ Still Relevant?

Written by Kris Wrenn

In economic theory, it is often said that markets, under certain conditions, tend toward equilibrium over time, meaning supply will adjust to meet demand, and prices will stabilise at a level where the quantity supplied equals the quantity demanded. This concept is rooted in classical economic theories which suggest that free markets, driven by the forces of supply and demand and minimal external intervention, are self-correcting.

However, the reality is more complex. While markets can and often do adjust to changes and disruptions in the short to medium term, this process is not always smooth or predictable. Various factors can impede or facilitate market adjustments, including:

Market Imperfections
Monopolies, oligopolies, and other forms of imperfect competition can prevent markets from self-correcting efficiently.

External Shocks
Natural disasters, geopolitical events, and sudden technological changes can disrupt market equilibrium.

Government Intervention
Regulations, taxes, subsidies, and monetary policies can either stabilize or destabilize markets, affecting their ability to self-correct.

Behavioural Factors
Investor psychology and consumer behaviour can lead to market anomalies and bubbles, complicating the adjustment process.
In some cases, government intervention may be necessary to correct market failures and protect the public interest. The idea that markets eventually sort themselves out holds some truth, but it’s important to recognize the limitations and challenges that can affect this process.

property graph economic cloc etc graph re done for diary and report

Investor emotion plays a huge role in magnifying the swings in investment markets. The key for investors is to not get sucked in to this emotional roller coaster.

A Visual Aid in How Cycles Work

Economic cloc full size (002)

So where are we now I hear you ask?
Although not all the descriptions listed have to follow in the exact order they appear, I think there’s a fairly convincing argument to say that we are sitting within the “Real Estate” section, possibly between 1 and 2 o’clock. i.e. After interest rates have risen but (potentially) before shares have fallen.
If you then refer to the property cycle:

propertyCloc Timing reduced size

Interestingly, you could make the same argument, that we sit around the 1 o’clock mark. i.e. we have already experienced increased rents, valuations rising, more buyers than sellers and are now experiencing (or are about to experience) an affordability crisis.

Key point – the various stages rarely fall like dominoes and it can take many months or even years to travel so much as one hour on the clock. In the case of property for example, the next step would be oversupply, which would obviously take a very long time to occur. Factors such as recent immigration figures could extend this further and further. So a downturn, assuming one even comes, could take many years.

Likewise, on the first chart, although we have certainly experienced the rising interest rates (1 o’clock), falling share prices are not necessarily inevitable. If you refer to the returns below, you will see that the Australian share market, although it has been excellent in recent years, has essentially achieved an average return similar to it’s historical average (not above).

Approximate ASX Returns as as 31st March 2024
1 year return – 15.5%
2 year return – 8.2% p/a
3 year return – 10.8% p/a
5 year return – 10.4% p/a
7 year return – 9.8% p/a

It is potentially more important than ever to consider having a diversified portfolio, especially for those approaching or in their retirement years. Although property and shares may well remain resilient, I most certainly believe that the Fixed Interest sector could prove just as financially rewarding over the next few years. Short duration funds are enjoying the benefits of higher interest rates, while long duration funds, having suffered significantly between 2021 and 2023 could potentially experience excellent returns as 5 and 10 year bond prices stabilise and eventually fall.

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