Markets are still following central-bank policy. The Fed has continued to indicate that a rate rise is possible in the next few months and yields and the U.S. dollar have responded accordingly. This has, however, not halted an ongoing recovery in oil and other commodity prices, helped by hopes of growing demand and – to a certain extent – some evidence of reduced supply.
So, as we approach the summer can investors start to relax? Unfortunately, I don’t think so. Thunderstorms – real or financial – are surprisingly common in the summer months. Equity markets go through sunny periods but rumbling in the background are high equity valuations and downwards earnings revisions. More immediate lightning could come from the June 23 Brexit referendum or several key impending central-bank meetings. And these are only the “scheduled” disruptive events: history suggests that we should also expect the unexpected.
There is a natural tendency to hope for a return to a more “normal” investment environment. So we look for “best case” outcomes to all these individual future events that, taken together, will eventually lead us to an improved and stable situation. But none of these forthcoming events can fix the current situation by itself. Whatever it decides to do in the summer, the Fed will have to remain very careful about its subsequent moves: a step-by-step approach will still need to be accompanied by clear communication. Likewise, were the U.K. to vote to leave the European Union, market uncertainty would likely spike – but voting to stay would not in itself resolve the region’s many other problems.
Instead, we need to focus not on regaining the “old normal” but anticipating the “next normal.” There will be plenty of future opportunities in this environment even if some underlying concerns – for example slow productivity growth, or the decline in investment returns to more normal historical levels – still need to be addressed.
Like it or not, we need to engage with the “next normal.” This will require an active but disciplined approach to investing backed up by sophisticated risk controls.