Stocks: Two Key Observations on Seasonal Volatility | Lord Abbett
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Market View

After another bout of September volatility, here are two important concepts for investors to consider.

Read time: 3 minutes

For Earth, Wind & Fire, “September” brings joyous memories of dancing and cloudless weather. For equity investors, the historical volatility seen in the year’s ninth month can carry far less pleasant associations. Indeed, September 2021 saw a fresh bout of equity market volatility, this time sparked by concerns about Federal Reserve tapering, financial difficulties at Chinese property developer China Evergrande Group, U.S. debt ceiling worries, and a number of other bricks in Wall Street’s “Wall of Worry.”

The historical tendency for markets to experience price swings during the months of September and October has been well documented. For a good illustration of the market’s seasonality, take a look at Figure 1. Data compiled by research firm EquityClock show that the Chicago Board of Trade Volatility Index, or VIX, which depicts the market’s expectation of 30-day volatility, has tended to climb in September and then reach a peak in October.

 

Figure 1. September-October Equity Volatility Typically Recedes in Subsequent Months
Chicago Board of Trade Volatility Index (VIX) average seasonal movements, 2001–2020

Source: EquityClock. Data as of December 31, 2020 (latest full-year data).
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

The spike in volatility in September and October is indeed eye-catching, but equally compelling, in our view, is how it historically has receded in the months that follow. Indeed, the last three months of the year tend to be the strongest seasonally for the S&P 500® Index after that volatility passes. 

And After August?

One other noteworthy long-term trend, in our view, has been identified by Strategas (Figure 2): Strong stock market performance through the month of August typically has been followed by end-of-year strength. In examining the 10 largest yearly gains through August 31 since 1954, note that while returns for the following September were variable and resulted in a modest average 0.7% gain for the 10 periods under observation, the S&P 500 gained an average of 4% for the last four months of the year, topping the overall average gain of 3.6% for the period since 1954. The percentage of positive outcomes for the 10 observed periods also exceeded the historical average.

 

Figure 2. Strong Performance Through August Has Typically Been Followed by End-of-Year Strength
Return and related data for the 10 best S&P 500 yearly performances through the month of August

Source: Strategas. Data as of August 31, 2021. Average=Average for all observed periods. % Positive=Percentage of positive years for the observed periods. Historical Average=Average for all periods since 1954. Historical % Positive=Percentage of positive years for all periods since 1954.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

Of course, the 20% return of the S&P 500 this year has been especially robust, and there is no guarantee that market strength through the first eight months of the year will be followed by gains in the final months.

What are the implications here? As we have noted before, whenever the U.S. equity market appears to be heading into a period of uncertainty, a lot of biases and emotions may wind up informing investment decisions, especially as the news cycle intensifies. But as history has shown, letting emotion and sudden changes in sentiment drive investment decisions may be detrimental to equity returns.

That has been borne out in the past, as investors who rush for the exits during periods of market volatility—whether in one of the September-October declines depicted above or in a or specific instance such as the March 2020 selloff—have seen the market recover its losses and move higher afterward.

A Final Word

We believe that technical analysis can provide a useful counterweight to sentiment-driven portfolio moves, offering an unbiased, objective way to evaluate the market. As a reminder, Lord Abbett employs technical analysis as a component of its Innovation Growth portfolios. It’s a strategic overlay aimed at identifying which stocks selected by our investment team have upside potential based on technical signals, and which ones may have reached peak price momentum and appear poised to move to the downside.  

We will continue to watch current market developments with an eye toward identifying noteworthy technical trends—and how this information can provide key insights for our investment team in the months to come.

 

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Market forecasts and projections are based on current market conditions and are subject to change without notice.

Projections should not be considered a guarantee.

Equity Investing Risks

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.

Fixed-Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. 

The credit quality of fixed-income securities in a portfolio is assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The views and opinions expressed are as of the date of publication, and do not necessarily represent the views of the firm. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Lord Abbett cannot be responsible for any direct or incidental loss incurred by applying any of the information offered.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

Please consult your investment professional for additional information concerning your specific situation.

Glossary & Index Definitions

 

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities in price trends and patterns seen on charts.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market’s expectation of 30-day volatility, using the implied volatilities of a wide range of S&P 500® Index options. It is widely used as a measure of market risk.

The S&P 500® Index is widely regarded as the standard for measuring large cap, U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

This material is the copyright © 2021 of Lord, Abbett & Co. LLC. All Rights Reserved.  

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Note to European Investors: This communication is issued in the United Kingdom and distributed throughout Europe by Lord Abbett UK Ltd., a Private Limited Company registered in England and Wales under company number 10804287 with its registered office at Tallis House, 2 Tallis Street, Temple, London, United Kingdom, EC4Y 0AB. Lord Abbett UK Ltd (FRN 783356) is an Appointed Representative of Duff & Phelps Securities Ltd. (FRN 466588), which is authorised and regulated by the Financial Conduct Authority.

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