Here’s how to tame the market chaos


Recent market fluctuations are part of natural law, one investor says, but how policy makers manage the "chaos" will decide who will come out on top.

In a note published Tuesday, Salman Ahmed, Chief Strategist at Lombard Odier Investment Management, likened recent volatility to the second law of thermodynamics — a theory which suggests that the natural state of the universe is chaos rather than order, but notes that humans can help delay and maneuver around this "natural state of affairs."

"The last few weeks in global risky asset markets have been a timely reminder about this underlying law of nature which governs the nature of both our world and the universe," Ahmed writes.

Brendan McDermid | Reuters

Markets have dropped significantly since the start of January, with the first week alone marking the worst ever five-day opening to both the Dow and .

"Indeed, as things stand right now, policymakers' ability to manage this increased "entropy" (disorder) in global risky assets will decide which camp (bulls or bears) will come out on top in the coming months and quarters," he explained.

Central banks are likely to deliver further easing in the coming weeks as they become more sensitive to financial conditions, Ahmed said.

European Central Bank President Mario Draghi last Thursday suggested further easing could be announced at the bank's March meeting. Some also expect the U.S. Federal Reserve to strike a more dovish tone at their next meeting despite launching its first rate hike since 2006 last December.

As for guidance where investors should put their funds, a research note published Monday by Neuberger Berman's President and Chief Investment Officer Joseph Amato said it's time take advantage of recent weakness and volatility and mark riskier investments.

China may be slowing but there is no significant risk of economic collapse, he says, adding that the Fed trajectory for three rate hikes across 2016 is likely to slow. And lower oil prices — which are hovering around $30 per barrel — are significant benefit to global consumers and lend support to the global economy, Amato explained.

"We...remain persuaded that it's likely a matter of time before markets re-focus on economic fundamentals," Amato wrote.

"For that reason, we believe that current volatility and weakness presents an opportune time to consider increasing weightings in risk assets," he said.