Leadership Perspectives | 10.14.20
Buckle Up: Advisors Brace for October Turbulence
Historically speaking, the securities markets' most volatile month has been October. Born in 1929, cemented in 1987 and revived with a vengeance in 2008, its wild-swinging reputation hasn’t receded over the years since the global financial crisis.
Month number ten, perhaps owing to Halloween, tends to be marked by fear.
Look at the VIX, also known as the fear index, a measure of forward-looking volatility.
Statistically, it tends to peak during October, according to Macro Risk Advisors.
“It’s a reflective time for money managers looking at the start of the final quarter and carefully considering how to position portfolios,” said Andrew Barber, a high-net-worth asset advisor in Corning, N.Y. "Under the best circumstances, there naturally will be tendency towards defensiveness."
This year, a sense of guardedness would seem warranted with a number of overlapping, unsettling fronts, politically and economically. And there’s a pandemic.
Perspective and Preparedness
How to navigate turbulence and assuage clients’ concerns comes back to perspective and preparedness.
First some perspective: Try to appreciate how October’s mysterious volatility – possibly owing to a self-fulfilling expectation for volatility based on history – has the potential for upside. Mark Hulbert of Hulbert Ratings measured the Dow’s gain from its lowest closing price during the month to its highest close over the subsequent two months. It turns out that since the late 1800s, October’s potential when measured this way is, on average, higher than for any other month.
"Though you’d have to be clairvoyant to fully capture this return, it’s a helpful metric with which to compare the stocks’ short-term potential," Hulbert said.
It’s important to be prepared for volatility in the coming weeks – learning from recent history – and keeping a cool head when others lose theirs.
"Unless you have other reasons to get out of stocks," Hulbert said, "you should ride out the volatility rather than go to cash."
Past is Prologue
The experiences from earlier this year, a time when the COVID-19 scare began and stocks wildly tanked, will serve advisors – many of whom spent hours reminding people of the asset allocation plans put into place – underscoring preparedness.
Mutual funds managed for the long-haul have come into view, particularly those that have shown an ability to outperform in downward-moving markets.
Savvy advisors in concert with thoughtful, engaged clients should be ready to rebalance portfolios to match strategic allocation targets. Calamitous periods for stocks are an opportunistic time to increase asset quality and perhaps jettison some small-cap stocks or junk bonds, while building some cash cushions for buying the best companies as the dust settles, experts say.
De-risking conversations will be on the table, regardless of irrational fear/panic levels, as some clients simply may see the first sign of trouble and seek to make a move, if only for peace of mind, in line with their risk tolerance levels which could change or suddenly become apparent for whatever reason.
Advisors, though, on a case-by-case basis, should be prepared to push back and hold the line on the asset allocation plan designed to withstand worst-case scenarios. For younger clients, the advice could end up being that with such a long time horizon, more risk is in order.
Bear market ETF strategies (shorting the S&P 500, for example) and gold-tethered products could be of interest to some of the most nervous or paranoid investors; putting some slice of retirement assets in “non-correlation” strategies might be appropriate but only within a sophisticated asset allocation mix of absolute return assets, safe assets, like treasuries, and risk assets.
As of September’s end, the best-performing liquid risk asset class was, generally, stunningly, crypto currencies. The Bloomberg Galaxy Crypto Index stood up 71% year-to-date, versus 25% for USD spot Gold and 4.5% for the S&P 500.
Currently, asset flows suggest sentiments in equity and bond markets are starting to diverge, Barber said. “This is normally an indicator of volatility ahead,” he said.
The rally in equities over the summer likely seems like it was overkill, with bullish sentiment driving stocks beyond levels that could be justified by fundamentals.
That, Barber explained, “leaves equities vulnerable to pullbacks on bad news.”
It’s 2020. There’s bound to be some.