With the uncertainty surrounding the Brexit vote now seemingly behind us, attention now turns to the next action by the United States (US) Federal Reserve (Fed). Investors may well be questioning if the Fed has cried wolf one too many times regarding interest rates.
The usual pattern is for the Fed to slowly increase market anticipation of an interest rate rise, only to find a reason not to move due to a global risk. This pattern resumed recently as the Fed’s statement left the door open for a September rate hike. December remains a more likely scenario as the election scheduled for November 8th will have passed.
The Brexit vote and US interest rates are examples of “event risk” that can often tempt investors to time markets. This usually leads to poor investment outcomes. In the two days after the Brexit decision, the SP 500 Index fell 5.3% as many investors sold out. In the next three days financial markets gained back almost all of the losses.
Brexit is also a reminder that investors should always expect the unexpected. Investment markets can be unpredictable. The only way to prepare for unexpected events is to have a long term investment strategy, including a diversified portfolio of investments which reflect your tolerance to risk.
An investor who holds a diversified portfolio based on a pre-agreed investment strategy is more likely to avoid panicking during market volatility. During the Brexit volatility, equity markets declined, while government bonds and hedge fund strategies increased in value. Diversification across a number of asset classes and strategies reduced overall portfolio volatility.
We will continue to monitor events in the UK and Europe post Brexit for any further impact on financial markets. Market volatility may also increase leading up to and after interest rate announcements by the Fed. We will provide another market update in the event there is a material impact on financial markets.