The volatility of the past two weeks in financial markets should serve as a timely wake-up call to return-hungry investors who had driven stock valuations to record levels, comforted by ample and predictable central bank liquidity injections.

Not only are the liquidity injections proving less potent in reliably overcoming a weakening economic recovery and less responsive fiscal policy support, but there are no easy ways to protect portfolios against major sell-offs. that is due to the deeply distorted nature of todays markets. government bonds and gold, the principal tools used for portfolio risk mitigation, have offered little protection recently to investors looking for diversification.

The rollercoaster ride in stocks is combining with multiplying signals of future large fluctuations in derivatives markets to raise doubt about the future. it is no longer clear that this is a short-term healthy correction that cleanses markets from excessive risk positioning and strengthens the foundation for further gains. more people are concerned that we may have started a more sinister adjustment process that pulls asset prices down closer to what the underlying economic and corporate fundamentals would support.

After a remarkable run that resulted in a series of new record highs for the nasdaq and s&p 500 indices, investors have been dealing with a more uncertain and unsettled situation. portfolio positioning to anticipate volatility has now expanded well beyond stock options to involve most other market segments.

Many point to the us presidential election and economic uncertainty as drivers of the volatility. these included the decisions by france, the uk and other european governments to reverse course on economic reopenings in the face of concerns about a covid-19 second wave. however, the principal cause lies in a subtle change in the main driver of what still is a remarkable stock market performance historically liquidity and the investor conditioning it has engendered.

Having long been comforted by the ample and predictable support provided by the big central banks, markets benefited from an additional funding influence that turbocharged performance during much of the summer. new ways of investing have encouraged smaller investors to put more money into the market. among them are user-friendly interfaces offered by providers such as discount brokerage robinhood and spreading fractionalisation of share ownership including the opportunity to buy a basket of shares for as little as $5.

The market-wide impact of that influence has waned in recent weeks but retail investors are still able to move individual stocks. the change has given more courage to bearish investors who have wished to challenge elevated valuations. at the same time, the us federal reserves oral communication has included some unsettling and unspecific language about the economic outlook and the policy response.

No wonder the initial market enthusiasm about the more dovish-than-expected statement after the feds last monetary policy meeting gave way to discomfort about the breadth and effectiveness of the central banks stimulus support.

Investors should not expect improving economic and corporate fundamentals in europe and the us. recent economic data confirm what started as a v-shaped recovery is now proceeding at a much slower pace.

Investors also should not expect us lawmakers to come to the rescue. what initially was an impressive policy response underpinned by three notions all in, whatever it takes and whole of government is proving harder to sustain and not just due to political polarisation. other countries are losing policy flexibility as growth slows, debt increases and burden sharing becomes a lot more complicated.

Key questions in the next few months for investors include whether the fed will reassert control over the market narrative; will new sources of market inflows materialise? and will traders continue to discount a lengthening list of economic and political uncertainties?

In answering these questions, i am reminded of an insight from bill gross, my former colleague at pimco and the fund management firms co-founder: to succeed as an investor, one needs expertise on economic and corporate fundamentals, investment maths, and a fine-tuned gut feeling. today, the first two are flashing yellow if not red for many investment opportunities. but it is the third one that matters most at this particular juncture.

My analytical side tells me that markets recent muddled moves could well signal greater vulnerability to price pressures that may prove problematic this time round. my behavioural side reminds me that market participants have shown an incredible repeated willingness to believe that historically unsustainable valuation levels long disconnected from underlying fundamentals will prove sustainable. my strong inclination is to side with the analytics.

The writer is allianzs chief economic adviser and president-elect of queens college, university of cambridge