When markets turn volatile, we believe that adhering to a long-term financial plan is better than reacting impulsively, and that attractive opportunities may be best discovered through active management and broad diversification.


The upswing in equity market volatility that began in early February has continued to agitate the markets, with nervousness about potential trade tariffs replacing inflation as a top investor concern. Earlier this year, concerns about accelerating wage growth spurring inflation and a more aggressive Federal Reserve sparked the initial wave of selling. Yet inflation expectations began pulling back almost immediately following the spike in volatility, which was little surprise to Western Asset, which expects continued constraints on inflation this year, or to Brandywine Global, which is looking for potential opportunities amid unfounded fears of rising rates.


S&P 500 and VIX (December 29, 2017 – March 29, 2018)

S&P 500 Volatility

Source: Bloomberg, as of 3/29/2018. Past performance is no guarantee of future results. This chart is for illustrative purposes only and does not represent an actual investment. Unmanaged index returns do not reflect any fees, expenses or sales charges. Indexes are unmanaged and investors cannot invest directly in an index.


Yet even as inflation concerns faded, volatility continued, in large part due to increasing uneasiness over the potential for serious disruptions to global trade. The Trump administration’s initiative to renegotiate some existing terms of trade with certain countries also includes the imposition of tariffs, which at a minimum could impact the flow of trade, benefitting some and disadvantaging others.

However, amid all the volatility, the outlook for continued economic and corporate earnings growth seems solid, even as market valuation improved—based on a decline in the forward price/earnings ratio of the S&P 500.

For ClearBridge Investments, none of the catalysts for the recent selloff alter the long-term fundamental outlook for the market. They believe that the strengthening global economy sell-off and earnings backdrop will eventually trump the nervous sentiment that’s driving current volatility. Small-cap equity specialist Royce & Associates concurs, believing that increased volatility is obscuring the rising strength of small-cap earnings.

Nonetheless, volatile markets may remain the norm for some time to come as the wrangle between sentiment and fundamentals plays out. As such, consider keeping diversification top of mind and reassessing asset allocation strategies to ensure alignment with investment objectives and risk tolerance.


You can’t diversify uncertainty …

It’s true that volatility can spook investors, but don’t let temporary market conditions derail your long-term investment plan. Panicking can lead to decisions that result in unnecessary losses, which can impede long-term potential.


… but you can diversify risk

Broad diversification can help to mitigate overall portfolio risks, and when markets get bumpy, valuation discrepancies may emerge between securities, sectors and asset classes, enabling active, value-oriented investors to make new acquisitions at lower prices or to lower the average cost basis in existing holdings.

In This Series

Market Volatility: Here We Go Again

Investment steps to consider with the resurgence of market volatility. 

Confront Volatility with Equity Income

Dividend-paying equities may help manage volatility in a diversified stock portfolio.

Unconstrained Fixed Income Strategies

Asset allocation, sector rotation, and macro strategies. The flexibility to choose is important in volatile markets.



Previous Editions

Market Outlook
Low Inflation Is No Mystery

Investment Insights
Why Earnings Matter

Investment Insights
Absent Facts, Fears Flourish

Investment Insights
That’s Why We Diversify

Market Outlook
Lessons from February: A Multi-Asset Perspective


All investments involve risk, including loss of principal. Past performance is no guarantee of future results. Please see each product’s webpage for specific details regarding investment objective, risks associated with hedge funds, alternative investments and other risks, performance and other important information. Review this information carefully before you make any investment decision.

Diversification does not guarantee a profit or protect against a loss.