Top of Mind: Volatility’s return, fixed income’s future, and other investment head-scratchers

What should we make of recent volatility? Can fixed income still play a defensive role? What asset classes look attractive today? Multi-Asset Strategist Adam Berger offers his thoughts along with research from colleagues across the firm.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. Your capital may be at risk.

This quarter’s "top of mind" topics

  1. What should we make of recent market volatility?
  2. Can fixed income still play a defensive role in a portfolio?
  3. How should I think about the risk of recession in the US?
  4. What asset classes look attractive today?

This quarter, I start with four key topics on clients’ minds: rising market volatility, uncertainty about fixed income’s defensive role, the risk of a US recession, and the search for attractive asset classes. Then I wrap up with a “lightning round” of quick responses to recent client questions on asset allocation, macro concerns, and fixed income.

1. What should we make of recent market volatility?

It may be surprising to see that equity market volatility since the start of 2018 is very much in line with long-term history, as shown in the top panel of Figure 1. So why does it feel so volatile? In part, it’s because we’re coming off a five-year period (2013 – 2017) of unusual stability, as shown in the bottom panel.

Figure 1

Percentage of total S&P 500 1-day changes in excess of...

But there have also been some bursts of extreme volatility over the past year, including in the fourth quarter of 2018 and August 2019 (Figure 2). In both cases, the percentage of days on which the S&P 500 changed by 1%, 2%, and 3% was higher than the average for any decade other than the 1930s. The uptick in volatility has not been limited to equities, either. In recent months, there has been a meaningful pickup in interest-rate volatility. In my view, the reduction in liquidity stemming from market structure changes following the global financial crisis (GFC) has contributed to volatility spikes, making what might otherwise be small moves into large ones.

Figure 2

Perhaps today is more of an outlier

I think this volatility is likely to persist, given the level of uncertainty around trade and other geopolitical and macro issues. How should investors respond? I’d offer three ideas:

  • Consider strategies that may take advantage of volatility and dislocation. This includes strategies that seek to take advantage of the changes in market structure by identifying relative value longs and shorts and being a provider of liquidity when things get out of alignment. It also includes strategies that seek to identify…

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