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Have the markets become anti-establishment?

The season of goodwill seems to stand in stark contrast to the generational disconnect that has emerged this year. As I look at my children, thankfully I don’t really feel a disconnect, and I find myself wondering if our priorities will really differ that much? I’ll likely receive my state pension aged 67. Whilst they’re far too young to even think of work, let alone retirement, will there even be a state pension for my children? And does this simple fact mean our priorities will have to differ? They’ve grown up online ‘having it all’ at the touch of a button but will they be the generation that has to fend for themselves? And therefore are they looking for a different type of government support?

The world is anti-establishment

This generational divide emerged for the third time this year as the Italians took to the polls in a referendum. But this time it was the unemployed youth that made an anti-establishment vote.

If things aren’t working, you either grin and bear it or you try to change them. According to the US Census Bureau, 60% of households have a lower real income in 2015 than they did in 2000. In the UK, Mark Carney has bemoaned the fact that British households have seen their earnings stagnate over the past decade. The last such “lost decade” was in the 1860s.

A muted market reaction

With Brexit, Trump and No dominating headlines this year, many expected markets to quiver. These votes have engendered significant uncertainty, and uncertainty tends to be the thing that markets hate more than anything. But markets, or equity markets at least, have largely shrugged the results off.

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Voting for change is one thing, but markets are something else. Financial markets have done pretty well since 2009 on the back of the status quo, so why might they looking favourably on all the opposing votes?

If markets could talk

When looking at markets it’s important to remember we’re looking at the opinions of market participants, or people. As you’ll know from many dinner party conversations opinions can change. But what could be the thoughts going through the markets?

  1. Things can’t change much: Could the equity market be saying that all of these votes for change won’t make much difference and the world will go on? It’s certainly tough to imagine that markets are expecting a complete breakdown of the Eurozone – given the likely chaos that would prevail. So the world is not as uncertain as you might think.
  1. They want change too, but not too much: Maybe equity markets are telling us that the current regime of loose monetary and tight(ish) fiscal policy isn’t working very well, and that a new approach (looser fiscal policy, more reform) would translate into better growth and greater prosperity.
  1. They’ve just gotten it wrong: Banish those notions of efficient markets from your mind. Markets change their collective minds, a lot, and sometimes with relatively little new information. So maybe all this hope and tranquillity is simply misplaced and asset prices could reflect the uncertainty in a few months.

Many investors will have weathered the political storm quite well this year, particularly those with a diverse, global exposure. But as we go into 2017 the interpretation will be important to ensure that risk is properly managed.

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