FE’s Rob Gleeson provides insight into why investors should not panic:

Market volatility, which has been low for a while, has suddenly come roaring back with a sell-off in most major markets underway.

The main driver appears to be a sudden loss of investor confidence, rather than any change in the fundamentals. While this is still unwelcome, it isn’t necessarily a sign of recession or some other more serious development. In the last three months markets had become too optimistic and are now returning to reality, fast.

Since the turn of the year markets had become over confident. In the US the Trump tax cut was driving up expectations of higher corporate profits, while the UK was pricing in a softer Brexit following the phase 1 agreement and some reconciliatory tones from the Chancellor.These things are far from certain, and that reality is suddenly being understood. In the US, the realisation that fiscal stimulus added to an already booming economy is likely to drive inflation and be offset by rising interest rates, is prompting investors and traders to dial back. This shouldn’t have been a surprise as most analysis of the tax cut suggested this would happen; but markets are not really rational and when times are good, fewer participants read the research. This is being compounded by the uncertainty caused by a change of leadership at the central bank as well.

In the UK, the hard line Brexiteers are threatening mutiny over the softer line that was beginning to appear, and Mrs May has responded accordingly by restating that Britain would be leaving the customs union. Again, this isn’t new and was already in the public domain, but investors were only listening to the bits they liked and not putting the situation in context. A rapid readjustment of expectations is underway. Additionally, it’s getting caught up in the US sell-off as well.

For now the irrational rise at the start of the year is being unwound. This won’t be orderly. The sell-off will spook investors into making panic trades and exacerbate the falls. These jitters are spreading to other markets, with Asia and Europe also getting in on the act. For this reason we expect the market to fall further before stabilising and settling at a new equilibrium.

The portfolios are positioned for this sort of volatility. While we had no way of predicting the sell-off, and no way of protecting against it completely, we manage the market exposure of each portfolio to make sure these sort of events are accounted for. Over the last couple of days we’ve seen Gilts hold, short dated credit and absolute return rise while the equity markets have sold off. Once the dust settles we expect each portfolio to have held to its risk target despite the sudden jump in volatility.

It is important not to overreact to these price swings. The overwhelming sensation will be regret for not having sold out earlier. Selling out now will only compound that by locking in the loss. The sell-off so far has taken us back to December. The rational response is if you were happy with your returns then, you should be happy now. We don’t see anything major to be concerned about at the moment. While some of the falls are severe, they are not yet symptomatic of anything more serious. We will of course be paying close attention to the situation and will be producing more analysis as it unfolds.