It was my turn to do the dreaded weekly shop last week and three-quarters of the way around Tesco, I went to the home baking section and reached for the next item on the list: dried apricots. I like to think that I am not a penny pincher, but I don’t like wasting money and will always try to get the best value item. However, I let out an audible gasp when I saw the price of the bag of apricots in my hand was over €10! Granted, it was a substantial bag, but in my mind, I was expecting €2 to €3, and paying over €10 was too much of a psychological barrier. I put them back and bought the smaller bag for around €5, even though it was more expensive per gram. So, I took the worst possible option financially, but psychologically I felt better and the possibility of some fruit-baked cake remained a reality when I returned home with a full list of ingredients.

The cost of living crisis has been the defining topic of the news in the last year. It feels as if we have been caught in a never-ending spiral of higher and higher prices, but the economic evidence is showing that it is starting to change. We must remember that inflation is the rate of change and that if my apricots stay at €10 until next year, then their inflation rate will be 0%, or if they fall to €9.50 it will be minus 5%. Mid-August saw the first “year on year” negative inflation print in a major economy, from China. This is the economy that was tipped at the start of the year to outperform all others as they finally emerged from Covid, but it has been so lackluster that the Chinese government surprised the market with an interest rate cut in the same week to stimulate the economy.

There is evidence elsewhere that inflation is falling, the US rate is currently 3.2%, down from 6.4% in January. The EU as a whole is 5.5% (8.6% in Jan), Korea and Japan are both close to 3%. Worldwide targets are generally around 2%, the point when central banks stop raising interest rates. What does this mean for your investments? Well, the government bonds that have been very popular this year may rise in value, making the yields lower to reflect a lower long-term rate.

It is also a positive for the general stock market, taking down the cost of borrowing for companies. It also makes the alternatives for investors less attractive. However, we all know that the financial markets can be a strange beast, and despite reductions in inflation, longer-term US yields have risen recently. It turns out the market had gotten complacent and expected inflation to fall quicker, so interest rates would come down sooner. This brings us back to psychology and humans making decisions based on emotion, leading to market reactions that can be the opposite of what you would expect. Think of the share that rises on bad results. Often the market was expecting terrible results, anyone who wanted to sell had already done so, and the only market participants left are long-term holders or traders who have sold the stock short and now are forced to buy it back.

We are always looking at market sentiment and trying to get an edge by gauging positioning – to be early into an investment and not the last one out. Chasing ‘AI’ this year was very fruitful if you were in early, but it is starting to unravel now 6 months later. It is very reminiscent of other recent market trends like meat substitutes or cannabis, where stocks initially skyrocketed, but then sharply reversed, before recovering slowly to reflect the improvement in the fundamentals, but also the slow grind to profitability and dealing with the practicalities of converting a new theme into sustainable profits. Maybe Apricot farmers will be the next big thing!

On a separate topic, I was amazed to find that economists now forecast the global population to start declining in 2050. We have known for some time that Western populations are shrinking and developing nations’ populations are rising, but this is the estimate of when the richer nations’ decline offsets the poorer one’s growth. Immediately I felt a sense of elation, thinking of the reduction in pressure on the global housing crisis, the climate implications, and the possibility of greater equality. However, it will pose a big question for the stock market which is growth-obsessed. I don’t have the answer to this and even the question may be decades away, but the stock market will pay attention at some stage.