Volatility Equities Chart

Will the Future Be More Volatile for Equity Investors?

 

11 May 2023
3 min read
Jillian Geliebter, CAIA| Managing Director―Equities
Kent Hargis, PhD| Chief Investment Officer—Strategic Core Equities; Portfolio Manager—Global Climate Transition Strategy
Equity Markets Have Been Relatively Calm in Recent Years
Bar chart compares the historical frequency of down markets in the MSCI World, based on rolling 12-month returns, over the last decade and the previous 26 years.

Past performance does not guarantee future results. 
*January 1, 1970 to December 31, 2012. 
Return buckets are based on returns for the S&P 500. Forward 12-month returns are calculated monthly with the average taken across all months in the period.
As of December 31, 2022
Source: S&P and AB

It’s hard to remember just how calm the last decade was for US equity markets. But from a historical perspective, that period looks like an anomaly. If volatility becomes more common in the future, strategies that help reduce downside risk should become integral to equity allocations.

Investors are still stunned by the scale of last year’s downturn. To some extent, the pain was magnified by the relative calm of the past decade. Even considering the sharp-but-brief COVID-induced crash in early 2020, US equities were less volatile from 2013 to 2022 than over the previous 40+ years. Our research shows that the S&P 500 Index was down only 13% of the time in the last 10 years, based on 12-month rolling returns, versus 22% of the time from 1970 through 2012 (Display, above).

Moderate gains were more common over the past decade. About 23% of the time, equities were up by as much as 10%—a historically strong run. Big rallies—with gains exceeding 10%—were also seen at a greater frequency, occurring 64% of the time.

Nobody knows what the future holds. But given severe macroeconomic and geopolitical stress as well as less support from central banks, it doesn’t take a stretch of the imagination to see more volatility in the next 10 years than in the recent past—in line with longer-term trends.

How to Prepare for More Frequent Downturns

Volatility shouldn’t scare investors away from equities. Instead, allocate strategically to dampen the downside. We believe high-quality stocks with stable trading patterns and attractive prices can help investors capture equity potential while navigating more turbulent market conditions ahead. An active approach focused on quality, stability and price (QSP) is especially important when investors are fleeing to safer pockets of the market and pushing up prices of defensive stocks.

Our QSP universe of US stocks delivered returns of –0.4% on average in falling markets over the last decade, when the S&P 500 fell by 7.5% on average (Display, below). In modestly rising market environments, QSP stocks advanced by 6.7%—2% more than the broader market.

In a Volatile World, the Pattern of Returns Matters More
Bar chart compares returns of defensive equity strategies focused on quality, stability and price, and the MSCI World, in three different market environments: declines, moderate gains and strong gains.

Past performance does not guarantee future results. 
QSP returns are equally weighted average returns for the quintile of stocks with the highest Strategic Core Edge. Strategic Core Edge is the expected return from a proprietary model combining a number of quality, stability and price factors, with a ratio of approximately one-third for each quality, stability and price component. 
Return buckets are based on returns for the S&P 500. Forward 12-month returns are calculated monthly with the frequency calculated across all months in the period.
As of December 31, 2022                                              
Source: S&P and AB

Don’t Fixate on Relative Returns

What’s the catch? When markets rose by 10% or more, QSP stocks underperformed the S&P 500’s 21.0% gain by 1.2 percentage points. So investors must get comfortable with sacrificing some return in very strong markets—less upside capture. The good news is that a strategy that loses less than the market in downturns can beat the market over time even if it doesn’t capture all of the market’s rallies.

Embracing this type of strategy requires a mindset shift that doesn’t fixate on relative returns quarter after quarter. Knowing that the defensive stocks in a portfolio are well positioned for hard knocks can help investors stay invested in equities to capture vital return potential for meeting long-term financial goals.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams, and are subject to change over time.

About the Authors

Jillian Geliebter is a Managing Director of AB’s Equities business. In this role, she works with the firm’s research and portfolio-management teams, as well as with clients around the world. Previously, Geliebter was a senior RFP writer for AB’s Equities services. She has been with the firm since 2009. Geliebter holds a BA in art history from New York University, and an MS in global finance from the Leonard N. Stern School of Business at New York University and the Hong Kong University of Science and Technology. She is a Chartered Alternative Investment Analyst (CAIA). Location: New York

Kent Hargis is the Chief Investment Officer of Strategic Core Equities. He created the Strategic Core platform and has been managing the Global, International and US Strategic Core portfolios since their inception in 2011. Hargis has also been Portfolio Manager for the Global Climate Transition Strategy Portfolio since 2022. Previously, he managed the Emerging Portfolio from 2015 through 2023. Hargis was global head of quantitative research for Equities from 2009 through 2014, with responsibility for directing research and the application of risk and return models across the firm’s equity portfolios. He joined AB in 2003 as a senior quantitative strategist. Prior to that, Hargis was chief portfolio strategist for global emerging markets at Goldman Sachs. From 1995 through 1998, he was assistant professor of international finance in the graduate program at the University of South Carolina, where he published extensively on various international investment topics. Hargis holds a PhD in economics from the University of Illinois, where his research focused on international finance, econometrics and emerging financial markets. Location: New York