2017 was an unusual year in equity markets. It was the first year ever that the S&P 500 advanced in each of the twelve months. Equity market volatility hovered at extremely low levels, with investors suffering just four days of 1% or more declines during the course of the year; whilst every major equity market across the world posted double digit returns. Strong earnings growth and a broad-based global economic expansion propelled global equities to all-time highs.

Entering 2018, January’s US equity returns were the strongest since 1997, with January often seen as a barometer for the rest of the year – "So goes January, so goes the year", says the old Wall Street adage. Against this benign backdrop it was easy to assert that some form of complacency would creep into the minds of even the most experienced investment professionals.

Excessive optimism set the scene for the return of market turbulence in February, with a spike in US wage growth stoking fears over inflation and rising interest rates. The shift in perception around inflation, combined with a slight lowering of growth expectations, led to a disorderly unwinding of heavily crowded short volatility trades, triggering a breakdown fuelled by algorithmic trading. Or, more simply, as Mike Tyson once said, “Everyone has a plan ‘til they get punched in the face” and investors were left bloody-nosed, nursing losses in excess of 10% during the first 2 weeks of February. The market correction served as a timely reminder of the risks inherent in equity investing and tested the nerves of market participants. However, we saw little evidence to suggest that this was the beginning of a more protracted downturn in stock markets – the US dollar remained weak, credit spreads did not widen meaningfully, whilst safe haven bonds and gold did not bounce back as they typically do when fundamental pain is perceived to be around the corner.

More importantly, strong synchronised global growth and cyclical momentum across the US, Europe, Japan and Emerging Markets points to continued expansion and this robust economic environment is filtering through to corporate profitability. Given the supportive economic and corporate backdrop it is perhaps surprising that we have seen such elevated levels of market volatility. The list of ‘known unknowns’ continues to evolve and occupy the minds of investors, with trade wars and Italian politics joining the risks of Fed policy error and Brexit complexities. Coupled with a protracted economic cycle and a 400% surge in the S&P 500 since the Great Financial Crisis, there is sufficient evidence to suggest that market volatility is here to stay.

The catalyst for the spike in volatility earlier this year evolved from inflationary fears and interest rate expectations, which suggests a regime change in markets as we shift from ‘deflation to reflation’ and from ‘zero interest rate policy to interest rate normalisation’. The volatility created by these seismic shifts creates a plethora of market opportunities for investors, in both overall tactical asset allocation and security selection. To that end, we maintain our long-term bullish stance on global Technology stocks, which should benefit from cyclical tailwinds, structural growth drivers such as artificial intelligence and cloud computing, whilst best-in-class balance sheets should insulate the sector from rising interest rates, but, as ever, growth always has a price.

In a bull market, the reaction to a setback is more telling than the setback itself. Now that the dust seems to have settled, we do not believe that we are at the tipping point for markets yet, but the air is getting thinner. As markets continue to advance we expect volatility to rise in successive spikes and balance sheets sensitive to rising US dollar funding costs to show signs of stress. Heightened volatility in asset prices should be embraced by active investment managers to benefit from market dislocations and capitalise upon opportunities presented, and act as a reminder that equity investment is not always a one-way, predictable bet.

Calum Brewster is managing director, head of UK regional offices at Julius Baer.