OVERVIEW
THE YEAR OF
VOLATILITY
STEW
News headlines, not market fundamentals, are driving sentiment
Drew Wilson
M
ulti-year market intervention by central
banks, peppered with strong words to
keep investors feeling safe and volatility
low, has faded and a consensus is forming that
says loose monetary policy has little effect on
economies or markets.
When central banks pumped money into the
system, it was easy to rely on beta to generate
decent returns, evidenced by notable gains in
the S&P 500 and certain Asian indices, said
Jeffrey Schutes, senior partner at Mercer.
But beta, or the “easy return” is much more
difficult to get today.
So what has replaced monetary policy as the
driver of global markets? In a word, headlines.
China’s economic slowdown, renminbi
devaluation worries, oil price swings and the
US presidential election, to name only a few
concerns, are agitating markets like never
before. Just as one event finishes, (remember
the Greek crisis? Then part two?) another
emerges to stir the pot (the Brexit vote).
Headline risks have always worried market
participants, but now there is a difference.
Investors lost trust in the reassuring voices
of central banks while at the same time, oldfashioned balance sheet-vetting is perceived
as less important than in the past— precisely
due to central bank market tinkering. That has
led some analysts to say that headline news has
replaced fundamental analysis as the driver of
investor sentiment. The result is volatility stew.
2
Capital changing places
Volatility, of course, causes drawdowns. Capital
flees to safe havens such as gold and sovereign
bonds. No surprise then that the gold and
sovereign fixed income indices rose high enough
in early 2016 to beat the “unbeatable” S&P 500,
which is up around 120% since June 2010.
Are flows into gold and sovereign bonds in 2016 a sign of volatile times ahead?
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