An Expert’s Guide to Market Volatility | ETF Trends

Recent market drama can be seen through multiple prisms. A cursory look at the performance of major U.S. averages reveals a modest correction in stocks with relatively little movement in interest rates.

That view, however, ignores a longer term, and brutal, bear market in emerging market equities and commodities. Furthermore, though Bloomberg data shows that developed market equities’ absolute declines fell short of a bear market, recent selling was in many ways unprecedented.

Markets went from complacency to panic in record time. The speed of both the decline and subsequent reversal pushed the VIX—one measure of market volatility—to its highest level on record, and it abruptly rose from 13 to more than 50 in a week, according to Bloomberg data.

Given the rapidity of this move and the signs that market volatility is here to stay, it’s worth taking stock of how clients are reacting. In recent weeks, I’ve had several dozen meetings and conversations with clients, during the course of which several consistent themes emerged.

Three Ways Investors are Reacting to Volatility

1. Uncertainty over the catalyst 

One common theme among investors: few feel they have a grasp on what really happened. Unlike previous selloffs—such as those sparked by the U.S. debt ceiling or numerous European woes—there was no clear catalyst for the late August, early September meltdown. While the media focused on China, everyone already knew that China’s growth was slowing. In addition, it’s hard to see how a modest depreciation of the yuan justified an evaporation of trillions of dollars in wealth. This uncertainty was only reinforced by the rapidity of stocks’ decline. Still, as I’ve been telling clients, regardless of what sparked the selloff, it’s important to keep it in perspective: market fundamentals generally remain solid.