Last week, rising geopolitical tensions finally derailed the 2014 rally.

Though U.S. stocks finished up for the week, the tragic downing of a Malaysian civilian airliner over Ukraine and worsening conflict in the Middle East sparked a market rout on Thursday that brought an unusually quiet period for financial markets to an end.

Since then, the market has been swinging between gains and losses, and investors should buckle up for more volatility ahead.

Why? Despite recent market swings, volatility is still very low by historic standards. Even at its peak on Thursday, equity market volatility, as measured by the VIX Index, only reached 15, roughly 25% below the long-term average, and by midday Monday, it was back down to around 13.

Low volatility suggests markets are complacent and not taking into account the prospect of bad news. Indeed, there is no shortage of potential triggers for more turbulence ahead.

To begin, geopolitical risk is clearly rising. If nothing else, last week’s tragedy in Ukraine demonstrated that the unrest in the eastern part of the country is far from over. Meanwhile, we are witnessing the continued fragmentation of Iraq and now a ground war between Israel and Hamas in Gaza.

In addition, investors should be mindful of conditions in credit markets. One of the major reasons volatility has been suppressed is linked to the unusually accommodative monetary policy of the Federal Reserve (Fed) and a very benign credit cycle. Should the Fed raise interest rates sooner than expected and foster a less accommodative regime, this would likely be associated with a further rise in volatility.

So while I still believe that stocks can move higher during the remainder of the year, further gains are likely to be accompanied by more volatility.

What does this mean for investors? Even a modest pickup in volatility will feel different compared to the placid environment of the past several months. To prepare for such a market landscape, I believe investors should consider focusing on asset classes that offer some relative value, and that can help mitigate the impact of a market correction.

In particular, I like an equity mix geared toward U.S. large caps, particularly in energy and “old tech,” and I would avoid the momentum names in social media as well as a large exposure to retailers and consumer discretionary companies. Finally, I also still advocate bringing up international exposure, particularly in Asia.

Investopedia and BlackRock have or may have had an advertising relationship, either directly or indirectly. This post is not paid for or sponsored by BlackRock, and is separate from any advertising partnership that may exist between the companies. The views reflected within are solely those of BlackRock and their Authors.

Related Articles
  1. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  2. Forex

    The Pros and Cons of a Fully Convertible Rupee

    Amid the rising economic power of India, the talks of making the Indian currency fully convertible are gaining momentum. We look at the pros and cons.
  3. Stock Analysis

    Has SanDisk Found a Bottom?

    Learn whether SanDisk has found a bottom. SanDisk is a manufacturer of memory-based products used in all sorts of technology products.
  4. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  5. Investing

    Finding Value in the Selloff Rubble

    Globally and in the United States, stocks are now in correction mode, with the recent erosion in equities in emerging markets and Europe in a bear market.
  6. Stock Analysis

    Benefits of Regional Bank ETFs over Commercial Banks

    The SPDR S&P Regional Banking ETF offers a stable local alternative to broad-based multinational commercial banking sector funds.
  7. Term

    What is a Peer-to-Peer Economy?

    In a peer-to-peer economy, individuals buy or sell goods or services directly with other individuals.
  8. Investing News

    What Shook the U.S. Stock Market Today?

    What was looking as a decent year for US Stock market has suddenly gone off track as the Dow Jones Industrial Average plunged 531 points in the week ending August 23, 2015.
  9. Investing News

    Oil or Gold: Which Will Recover First?

    Not sure where oil and gold are headed? The answer is complex.
  10. Mutual Funds & ETFs

    The 8 Best ETFs for Rising Rates, Flagging Stocks

    With the markets starting to sag, should you go on the defensive? If so, which ETFs should you consider?
RELATED TERMS
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods ...
  2. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  3. Inflation

    The rate at which the general level of prices for goods and services ...
  4. Agency Swap Program

    A form of securitization whereby single-family residential mortgages ...
  5. Deflationary Spiral

    A deflationary spiral is when a period of decreasing prices (deflation) ...
  6. Freelance Economy

    A freelance economy revolves around hiring self-employed workers ...
RELATED FAQS
  1. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  2. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>
  3. Are Social Security benefits adjusted for inflation?

    Social Security benefits are adjusted for inflation. This adjustment is known as the cost of living adjustment (COLA). For ... Read Full Answer >>
  4. What is the correlation between inflation and interest rate risk?

    There is a positive correlation between inflation and interest rate risk. Inflation basically occurs when there is too much ... Read Full Answer >>
  5. When phase of the economic cycle tends to be strongest for companies in the retail ...

    The economic cycle has four phases. The expansionary phase occurs when the economy is growing. During this phase, cyclical ... Read Full Answer >>
  6. What is the average length of the boom and bust cycle in the U.S. economy?

    The boom and bust, better defined as expansion and contraction, business cycles of the U.S. economy averaged 38.7 months ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!