Settled weather leaves investors becalmed but woos companies out to play

On our forecasts for the global economy, there are also good reasons to believe that volatility will stay low for some time to come, particularly in equities and FX, beyond the short-lived spikes that we always see around large economic and political surprises. Rate markets are a partial exception to this, mostly because it is here – uniquely in the asset classes – where we can find some evidence that QE and forward guidance may be playing an important role in dampening volatility. That raises the prospect that, as central banks move away from these policies, volatility in bond markets might rise.

By contrast, we cannot find much evidence that central bank policies are a large part of the story of low volatility in equities or FX. And although people often take it for granted that more volatility in bond markets would spill over into more volatility elsewhere, the bond market sell-offs in 1994, 2003-04 and even last year’s “taper tantrum” illustrate that those links have historically been weaker, and shorter-lived, than that view assumes.

These more benign arguments feel uncomfortable since they risk the accusation of complacency. Our argument is not that volatility will stay low forever. We argued strongly in 2006-07 that periods of low volatility, by encouraging leverage, ultimately tend to sow the seeds of their own demise. But we think that this point is not yet at hand.

Cycles mature and die eventually. But they do not generally die of old age. At its core, our argument is that this cycle is at an earlier stage than many people think. With the crisis still firmly in the collective memory and regulators watching potential financial risks and bank leverage much more closely than in the last cycle, we think it will take longer than normal for any potential imbalances to emerge. Charlie Himmelberg, our chief credit strategist, has argued that macro-prudential regulation, if successful, may lead to a tamer credit cycle and reinforce a period of “greater moderation”.

Volatility might shift higher earlier than we think under two conditions. The first is that we could be closer to the point where the unemployment rate becomes a binding constraint and inflationary pressures emerge. A sharp shift in the inflation picture in particular would represent the kind of break with the past that might change the volatility landscape.

The second is that the exit from unconventional policy and zero policy rates could lead to a sharper rise in uncertainty about where rates belong and how that affects the value of other assets. Both risks bear watching but neither is our central case.

The lack of volatility may pose challenges for investors. But there is an upside to “boring”. Companies have been waiting for several years for a point where the outlook seems predictable enough to hire, invest and make strategic purchases. There are signs in recent months that they are now deciding that point is at hand.

If those signs continue, they will help to strengthen the shift to above-trend US GDP growth that may have just begun.

Dominic Wilson is chief markets economist and co-head of macro research in the Americas and global economics research at Goldman Sachs

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