Were markets overdue for a pullback? Michael Craig explains.

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* We've seen a spike in volatility in recent trading sessions. And joining us now to discuss what's been rallying the markets and where things may go from here is Michael Craig, managing director and head of Asset Allocation and Derivatives at TD Asset Management.

* Mike, we got some big market declines on Monday on the back of selloffs last week. What's driving the volatility?

* Well, markets had been somewhat a little bit too calm going into this. Lots of investors had been a bit overly bullish. Levels of volatility were quite low. The VIX was trading at about 11. And so on the face of it, this is an old-fashioned market correction, if you will. Lots of things, not only stocks, but certain currencies have suffered and various bond markets have rallied and really just reflecting built-up investor positioning that was probably overdue for a correction.

* And there's also some unwinding of some popular trades in technology in the end, correct?

* 100%, yeah. I mean, Japan saw momentous declines on Monday. That has bounced almost as much so last night. And so, again, a lot of this is just one-sided trading markets not really finding a balance and a lot of investors pulling back risk. I'm not saying it won't continue, but again, on the face of it, old-school correction.

* OK. Now, all this is happening, of course, as investors look ahead to Fed Chair Powell's comments at Jackson Hole symposium later this week. What does this mean for the Federal Reserve going forward?

* I mean, there's a few things that we have a higher degree of certainty and we have to think about going into the fall. First off, the Fed is probably now behind the curve in inflation and expectations. A lot of this bond rally has been inflation expectations declining. We're running still very, very tight policy markets. Earlier this year, there were strategists expecting no cuts. Now, the market's looking at about 4 and 1/2 into the end of the year.

* And so really, how he lays out current stance of policy and going forward will lead to, again, more volatility because the longer we go with restrictive policy into a slowing backdrop, that's not a great mix for economic growth. And so investors will be looking for cues in terms of what we should expect from the Fed into the fall. And we'll certainly be going into some degree of a cutting season.

* And it seems like a price cut or rate cut is almost priced in for the interest.

* Well, yeah, not only just a cut, but 50 basis points. So the market's looking for 250s and possibly another quarter by Christmas. This is not consistent with the message a month ago. And so great news on the inflation front. That's very positive.

* But now, it's managing the growth trajectory going forward. And it really got started with the weak payroll report on Friday. It's still positive, which is good, but the rate of change is certainly not going in the right direction. So I think the Fed will look to pump the brakes here on restrictive policy and start to loosen.

* Now, given all this volatility, this market turbulence, what should investors keep in mind going forward?

* Well, I was looking this morning. If you look at the prices to forward expected earnings, they're back to a bit more of a fair range. And empirically, returns tend to be much stronger when you're buying at cheaper prices. And so I would expect to see more vol into the fall. We're running fairly balanced right now. We actually-- our wealth asset allocation committee raised cash a few weeks ago on the expectation that we'd see some fall volatility.

* Our thought process right now is putting together our buying list and where we want to start adding into this by taking advantage of some of this volatility. So on the equity side, it's been a pretty good year. We've given back some of the gains. Balance investors won't see a huge shock over the last few days because as much of equities have sold off, bonds have actually performed quite well.

* And then for more conservative investors, it actually has been a pretty good period recently with the bond market rallying. And so depending on the asset and type of investor you are-- if you're a full equity investor, you should expect sell-offs from time to time. But for the more conservative, balanced investors, it actually hasn't been too traumatic a few days.

* OK. So given what we've seen the last couple of days, what will you be watching closely over the next few weeks?

* The inflation prints for certain. The ISM services prices paid yesterday was a bit hot. So really, I believe it's the 14th we get US CPI. A hot CPI is a problem. I would expect it to be cool. But any month-to-month data can be quite flaky.

* And secondly, I will look at that-- the August jobs report that will come in the first week of September. I think those are the two key data releases going into the Federal Reserve's decision later in September in terms of setting monetary policy. We're looking at those. And I think you'll see quite a bit of market volatility around those days because any myths either way will have implications for both bonds and stocks.

* Our thanks to Michael Craig, managing director and head of Asset Allocation and Derivatives at TD Asset Management.

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