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An Expert's Guide To Market Volatility

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.

The 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 sell-offs - 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 sell-off, it's important to keep it in perspective: market fundamentals generally remain solid.

2. Is It Time To Buy Emerging Market (EM) Equities?

Other than commodities, EM equities have been one of the worst-performing asset classes in 2015. The recent carnage has only added to their multi-year period of underperformance. As a result, EM stocks, as measured by the MSCI Emerging Markets Index, look fairly cheap on an absolute basis and very cheap relative to developed market equities, as measured by the MSCI World Index. With EM valuations at a significant discount and sentiment toward EM stocks extraordinarily negative, investors with a contrarian streak are wondering if it's time to buy. My view: it depends. Selectivity in EMs is key. I like stocks in Asia (outside of China) as well as those in EM countries that have been embracing reforms, such as Mexico.