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Higher volatility when volatility is low

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

Market volatility is back. Most major central banks will tighten policy this year as inflation slowly rises. Markets care about this. A trade war may not be likely, but trade battles are. Listed firms run most of the world's trade. In fact, trade inside listed firms is a large part of world trade. Trade battles hurt markets much more than they hurt economies. Investors rightly ignore politics a lot of the time. But some political risks now target named firms. Tweets mentioning single firms can add volatility.

Market volatility has clearly risen. Economic volatility has not. Investor fears of a "soft patch" at the start of this year are overdone. Trends are good in most major economies. Jobs growth is still strong in Europe and the US. The US economic recovery is the second longest in 80 years. This worries some people. However, this recovery has been the slowest in 80 years. This does not look like an economic bubble about to burst.

Market volatility with little economic volatility means investors need a new approach. What worked in 2017 may not work in 2018. Diversification can
insure investors against some volatility risk. An active investment plan can help to ride volatility.