Positioning in a Market Correction

A Necessary Jolt to Investors

Markets officially entered correction territory in early-February, triggering a global sell-off that sent ripples all the way to Asia.

After 9 years of expansion following the 2008-GFC, volatility roared back into markets unsettling the calm that pervaded markets for almost a decade. But behind the pullback is a reminder to investors that markets can go down and that volatility is part and parcel of investing.

A market correction is simply an attribute of a normal and healthy functioning market that helps re-establish the relationship between interest rates, inflation levels and valuations. A 10% stock market correction like that seen in February is not uncommon if one were to look back at the long history of stock market cycles.

Whilst, market volatility isn’t something investors look forward to or anticipate, the recent correction serves as a useful (but often painful) lesson for investors to never take volatility for granted and always be prepared.

Here are some tips how:-

  1. Expect the Unexpected

Volatility is here to stay and the sooner investors’ start accepting this as a market truism, the quicker they can accept and move on.

Even though markets have since rebounded and are now gaining back some lost ground from the recent sell-off, global markets are unlikely to revert back to the unusually calm and tranquil market condition last year.

For context though, stock market volatility was unusually low in 2017. The Cboe Volatility Index or VIX, otherwise known as the ‘fear gauge’ of markets and the most commonly used barometer of expected near-term volatility for US stocks, posted a historically low average of just 11 last year.

During the recent correction, the VIX index spiked up 20.01 points to close at 37.32 on 5 February. A sharp unwinding of inverse volatility products exacerbated the sell-off and contributed further to the violent swing in markets.

But with most of these positions now already unwounded, we could expect some market stability moving forward as this correction appears to be driven by the reduction in leverage rather than deterioration in fundamentals.

The level of fear in markets has certainly fallen, but is still unlikely to return back to pre-correction levels. Investors would be wise to do the same, by staying vigilant and not remain complacent.

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