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  • Investment

Industry Voice: When the Dust Flies - How Volatility Events Affect Asset Class Performance

  • Sponsored by PGIM
  • 15 July 2020
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We investigate asset class performance before, during and after sharp increases in equity market volatility, and examine specifically how stocks and bonds perform during such events and whether asset class performance after such an event is different than leading into the event.

We define two types of volatility events: "spikes" and "post peaks." A volatility spike event is a significant, sudden increase in volatility, and we measure asset class performance while "the dust is flying." In contrast, a volatility post-peak event is a period of high volatility that is followed by volatility returning to its pre-peak level, and we measure asset class performance "after the dust has settled."

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History shows that volatility spike events produce large negative returns for equities and credit bonds (with positive returns for Treasuries) which may be unnerving to some investment committees.  However, markets recover relatively quickly, approximately by the seventh month following the volatility spike month.

Some investors may wish to wait until the "dust settles" - either out of caution or time needed for deliberation - before re-examining their investment strategy. Once volatility has smoothed out, equity and credit markets still tend to perform well.

The evidence from both types of volatility events suggests that the damage from those volatility events is transitory and is likely to be repaired after a reasonable period, providing support for investment committees who intend to "stay the course," and possibly re-balance with increased allocations to risky assets.

 

For Professional Investors only. All investments involve risk, including the possible loss of capital.

In the United Kingdom and various European Economic Area jurisdictions, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority of the United Kingdom (registration number 193418) and duly passported in various jurisdictions in the EEA. Prudential Financial, Inc. of the United States is not affiliated with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. These materials are issued by PGIM Limited to persons who are professional clients or eligible counterparties as defined in Directive 2014/65/EU (MiFID II), investing for their own account, for fund of funds, or discretionary clients.  In certain countries in Asia, information is presented by PGIM Singapore, a Singapore investment manager registered with and licensed by the Monetary Authority of Singapore. In Japan, information is presented by PGIM Japan Co., Ltd., a registered investment adviser with the Japanese Financial Services Agency. In South Korea, information is presented by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean investors. In Hong Kong, information is presented by representatives of PGIM (Hong Kong) Limited, a regulated entity with the Securities and Futures Commission in Hong Kong to professional investors as defined in Part 1 of Schedule 1 of the Securities and Futures Ordinance. It is anticipated that certain investment management services would be delegated to PGIM, Inc. the above listed entities' U.S. registered investment advisory affiliate.

All investments involve risk, including the possible loss of capital. There is no guarantee that any particular asset allocation will meet your investment objectives. The findings shown herein are derived from statistical models. Reasonable people may disagree about the appropriate model and assumptions. There can be no assurance that model returns can be achieved.

In providing these materials, PGIM is not are not acting as your fiduciary. These materials are for informational or educational purposes only. The information is not intended as investment advice and is not a recommendation about managing or investing assets. These materials represent the views, opinions and recommendations of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein.

The PGIM logo and the Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.

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