Investors are daring to hope for some stability in the stockmarket

In “The gap in the curtain”, a novel written by John Buchan in 1932, a scientist picks five subjects who are shown the front page of a newspaper, one year in the future—the figurative gap in the curtain of time which gives the book its title. Two see their own obituaries and spend the next year driving themselves mad in their efforts to prevent their fate. As the day arrives one realises he was mistaken: it was not his obituary, but one for a man of the same name.

Hugh Hendry, an eccentric hedge-fund manager, has called this the “best investment book ever written” because it taught him to worry about the journey, as well as the destination, of asset prices.

In October 2023 American stocks, as measured by the level of the S&P 500, are hovering at around 4,100 points. If she had been able to peer through the gap in the curtain, your correspondent would have seen, at various points in 2021, 2022 and 2023, that stocks at the end of 2023 would be largely unchanged from their level at the time.

But that would not have revealed much about their ups and downs along the way. In 2021, with the bull market roaring, investors might have assumed a serene plateau. In 2022, with shares plunging like a falling knife as interest rates were jacked up, they might have thought monetary tightening had stopped. Instead, the three-year chart of American stocks looks like a rollercoaster, with steady climbs and violent plunges.

Now the situation is stranger than even science fiction might predict. Despite extreme and continuing increases in interest rates, which caused the failure of several medium-sized banks in the spring of 2023, unemployment is still just 3.8%. And despite continued strong economic growth, inflation has become much more manageable. During 2023 markets have embraced this unusual mix of strong growth, moderate inflation and rising interest rates, although not without some wild gyrations along the way.

But the destination is only half the story. The journey matters just as much. It is hard to imagine that even higher rates will not break more things in America’s financial system, perhaps enough of them to upset economic growth. Already alarm bells are ringing in the commercial-property sector, and the value of many bank assets will have fallen further in 2023 as rates climbed. The so-called “shadow banks” which have sprung up in corporate loan-making might struggle if growth starts to slow.

Still, many of these risks are already apparent. None has dimmed growth or investor enthusiasm yet. The pollyanna-ish story is that of the “soft landing” in which growth remains robust, inflation floats gently back to Earth and the Federal Reserve can start trimming rates from their elevated levels in 2024 or 2025. This scenario would surely fuel a surge to new all-time highs (stocks are around 13% shy of that level now).

Peeking through the curtain to October 2023, in 2021 or 2022, might not have helped an investor understand the wild unpredictability of post-pandemic financial markets. In 2024 markets may finally chart new territory. ■

Alice Fulwood, Wall Street correspondent, The Economist