Global politics may be nightmarish volatile right now, but the reverse is true for global stock markets.
Market volatility has been at its lowest level for a decade, while the Wall Street “fear gauge” recently hit a seven-year low.
It seems that Western central bankers are more powerful than Isis, Putin, eurozone deflation, Gaza and the Chinese property bubble rolled into one, as they can soothe all these worries with just a few dovish words.
Low interest rates and easy monetary policy have wrapped stock markets in a nice warm comfort blanket for years now. Whenever signs of volatility emerge, central bankers smother it at birth.
It can’t last forever.
Doves Soft Soap Markets
Stock markets aren’t the only area of low volatility this year.
Oil price volatility recently hit a seven-year low. The volatility of Citigroup’s ‘economic surprises’ index for the world’s largest economies recently hit rock bottom.
Dollar/euro volatility has never been lower. Last month, JPMorgan’s Global FX Volatility Index hit an all-time closing low of 5.29%.
Illimar Mattus, chief finance officer of Armada Markets, has never seen anything like it in 17 years of trading.
He doesn’t think it will last. “We have seen something similar in August of 1998 and July of 2007 which were both followed by major market turmoil.”
Hold on.
How Low Can You Go?
After all last year’s excitement, when the FTSE 100 grew 14.4% and the FTSE 250 doubled that with 28.8% growth, this year has been disappointing.
The FTSE 100 is up just 0.4% so far this year, the FTSE 250 is down 0.6%. Both markets are off their 52-week highs of 6878 and 16,728 respectively.
At least investors can console themselves with dividend income, with the FTSE 100 currently yielding 3.43%, and the FTSE 250 yielding 2.6%.
And if you do want to buy, neither market looks over-priced, trading 13.6 and 18.4 times earnings respectively.
But soon, something has to give.
War And Peace
Today’s “quiet, too quiet” market is false, discomforting and dull. It makes investors nervous, because they keep anticipating a correction that never comes.
Low volatility also makes active stock picking harder, as central banker winks and nudges dictate share price movements, rather than company fundamentals.
The return of volatility should give us more opportunities to take long-term positions in our favourite companies at (temporarily) lower prices.
There was a window last week, when the FTSE 100 plunged to around 6500, but it quickly passed, when central bankers stroked and swaddled markets again.
Move On Up
Rising interest rates will change everything. That process is most likely to start in the US, despite this week’s brace of votes on the Bank of England’s monetary policy committee for a 0.25% base rate hike.
Last year’s taper tantrum gave some taste of what may be in store. Markets quickly got over it, though. And with luck, US monetary tightening may be offset by eurozone easing.
Stock markets are set to start moving again, in both directions. Get ready to buy.
