Financial markets have become accustomed to depending on central bank intervention and stimulus to calm the volatility. Expectations of lower interest rates and / or quantitative easing as the panacea for financial market uncertainty is also, potentially as big an error in judgement as were the "bookies" odds on Brexit.
In the beginning, when it was a less expected event, Quantitative Easing played a unique role in supporting asset prices. However, central bank intervention has become so built-in to the market psyche that now a failure of central banks to act (with stimulus) is taken as a negative and leaves financial markets vulnerable to volatility if they (central banks) do not act or act in a way that was less than what was expected.
Clearly, the Fed orchestrated higher prices for the S&P 500 by growing their balance sheet through the 3 rounds of QE. Over the past year and a half the Fed's balance sheet stopped growing and markets became more volatile: cause and effect.
It has become quite clear that the European Central Bank and Bank of Japan's experiment with negative interest rates has not been as effective in re-ignating economic growth and inflation as had been hoped.
Dependence on central banks will wane as it becomes clear that their effectiveness is limited. That will pose some significant issues for risk assets when they cannot provide the hoped for growth. Those who are over-exposed will be subject to more significant drops (like last Friday's) in the value of those assets, especially if and when the global economy follows the UK into recession.
In a Bloomberg survey (above) economists are split on whether the recession will take hold in 2016 or 2017.
Central banks will continue to do what they can to come to the monetary aid of the global economy, but they cannot do it without government coordinated with fiscal stimulus (and for that you need responsible government and quality leadership).
The bounce in financial markets (the "relief" rally) should be looked at as an opportunity to re-think your exposure to risk assets, try not to let it give you consolation.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist