It is a peculiar period in the stock markets at the moment. Valuations in equities have been generally positive, bond markets seem to have been positive and with even Spanish debt at a lower yield than the US, the measures of volatility in trading seem to be at near record low levels. Something strange is going on. It is not as though there isn’t any news, and certainly no reason for any complacency. There are the geopolitical issues still around us from Ukraine to the East China Sea, via Syria, Iraq and others, but they seem to be having little impact, at least for the moment. However, the unfolding chaos in the seeming break up of Iraq could be such a catalyst if the US feels itself being drawn back in to support its unreliable ally against the forces of terrorism.
We still have huge debts in the developed nations, and interest rates are still at life support levels so there are many things still to fret about, but seemingly not enough to frighten the markets – yet. However, now we have been given a clear steer from Governor Carney at the recent Mansion House speech that rates are heading one way, and very likely sooner (as we have been previously talking about) than many had formerly thought.
Caesar wrote of the sickly swell and almost oily seas edged by the “iron cliffs” that masked the normally tumultuous waters around the Pentland Firth. This frightened the navigating Romans who feared that such a false calm could not last. This same sickly calm is how these markets feel as we wait for something to happen that could break this silent complacency.
So what has changed? Well of course one key issue has been the regulatory world, where banks and investment houses take every opportunity to avoid risk, whether it is with their business or seemingly with their investments. It’s almost – when in doubt, don’t! From FX trading to accusations of market manipulation, the orders from the Compliance officers are quite clear – don’t get us into trouble, so just don’t bother to trade.
What can change this? Well there will be a catalyst for change in the investment complacency, but where from? In the past this could have been from some commodity prices, like oil, or from a squeeze in the credit markets – but both seem quite unlikely for the moment. My guess will be that it will come from investment houses trying to search out any better performing assets and finding themselves constrained in an illiquid market where prices fall and they can’t sell. However, for the meantime dull is good. It may not be wildly exciting but it has been profitable, especially for those happy to be compounding their dividends and continue a slow and steady, even if somewhat desultory, gain. This may change though if we do start to see even the smallest of interest rates rises in the developed world.
What we can do as investors is just make sure that we have a little cash set aside, so that when the markets change, we can use such new found volatility to our advantage.