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Amid market volatility, keep calm and carry on

Caroline Purser | Photographer's Choice | Getty Images

As equity markets enter a period of increased volatility amid growing uncertainty over the timing of the Federal Reserve's first rate hike, the message from strategists to retail investors is to keep calm and carry on.

"Our message is that these short-term spikes in volatility could lead to a couple of down days, but just because volatility is trending higher that doesn't mean equity market will go down. It just means that the unusually straight line up doesn't continue," Manpreet Gill, senior investment strategist at Standard Chartered told CNBC.

The CBOE Volatility Index, which shows the market's expectation of 30-day volatility, spiked 27 percent to 16.95 on Thursday – its highest level since April 11, but below the historical average of 20.

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The move came as the Dow Jones Industrial Average sank 1.9 percent, erasing its gains for the year, and the S&P 500 dropped 2 percent. The Wall Street gloom extended into the Asian trading session on Friday, but losses remained contained. The Nikkei slipped 0.2 percent, while the Hang Seng Index traded down 0.5 percent.

"We wouldn't advocate trying to time the swings, especially for retail investors. We believe any pullback is likely to be limited and short-lived in nature as long term indicators like valuations, earnings and key macro indicators are still very supportive," Gill said, adding that he expects downside in U.S. stocks to be capped at 5 percent.

The U.S. economy expanded at an impressive 4 percent annual rate in the second quarter as activity picked up broadly after shrinking at a revised 2.1 percent pace in the first three months of the year.

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On top of this, there are more signs of an improving labor market: U.S. labor costs recorded their largest increase in more than 5-1/2 years in the second quarter, a sign that a long-awaited acceleration in wage growth was imminent.

With the economy getting stronger, this has fueled concerns that the Fed may hike rates sooner rather than later.

King Lip, chief investment officer at Baker Avenue Asset Management expects a sharper fall in the U.S. market of up to 10 percent, but believes market weakness will be temporary.

"I wouldn't be surprised if we see 5-10 percent correction from these levels; it's been quite some time since we've seen that and it would be normal volatility. I think traders were looking for a catalyst to sell," he said.

"That being said, the underlying fundamentals are still good, [the] earnings season was very good, the economy continues to recover; so we continue to be believers and buyers of the market over the long term," he added.

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Fed to contain volatility

Chris Weston, chief market strategist at trading firm IG, says while volatility is indeed set to rise, prolonged periods of large swings are unlikely.

"I think there will be increased bouts of volatility – like 1-2 percent swings, but it won't be savage. The Fed has said time and time again that they are watching asset market, and they will come out with soothing words to calm bouts of volatility," Weston said.

"People aren't used to selloffs – but it's important to remember that we are just 3 percent from highs [in U.S. stocks]. You've got to take a step back and accept that 1-2 percent moves are going to happen, and remember that the fundamental picture is improving," he said.

For retail investors with a shorter-term horizon, Weston recommends looking at hedging strategies such as buying VIX futures, for example.