The financial markets turned volatile last week as concerns over China’s economic growth, coupled with fears over a Fed rate hike, caused sharp price swings in nearly every asset class. On a week/week basis, however, not much actually changed.
Equity Market Volatility: VIX
Treasury Market Volatility: MOVE Index
In an increasingly electronic and algorithmic trading environment, this type of market volatility is likely to increase in frequency. We have the luxury of being long-term investors, and we strongly believe that not overreacting to short-term volatility will generate better risk-adjusted returns over time. In fact, we tend to trade less in markets like these to avoid subjecting our clients to poor execution levels resulting from high volatility or a lack of liquidity. We have quoted this phrase in the past when Europe was reeling from the Greek sovereign debt crisis, and we think it’s a good motto to have whenever short-term volatility picks up: “Keep Calm and Carry On.” These types of markets will create opportunities for investors who focus on fundamentals and have the patience to take advantage of mispricings. We focus on this, not on the constant CNBC fear headlines, and we encourage you to do the same.