Market on edge: navigating market turmoil and rising volatility

Market on edge: navigating market turmoil and rising volatility

Equities 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Summary:  Amidst rising volatility, especially during this U.S. election year, diversified portfolios - spreading risk across asset classes like fixed income, commodities, and foreign currencies - are showing greater resilience and profitability, offering a crucial defense against market uncertainty.


Diversification in action: navigating market turmoil and rising volatility



September 3, 2024, served as a stark reminder of the volatility we’re facing in the markets. While Wall Street remained closed for Labor Day on Monday, futures pointed toward a volatile trading session on Tuesday, reflecting the uncertainty ahead. Contributing to this unease was the ISM Manufacturing PMI, which came in less favorable than expected, signaling weaker growth in the manufacturing sector. Later in the day, further market jitters were sparked by reports that Nvidia had received a US Justice Department subpoena. However, it now appears that this news may be unfounded, adding confusion to an already volatile trading environment.

Amidst this market upheaval, volatility is climbing, as seen in the VIX seasonality chart, which shows a historical rise in the second half of the year. What’s particularly noteworthy in 2024 is how volatility has risen above historical averages beginning September, after a relatively calm first half.

As volatility rises, so does the risk to your portfolio. While you can’t control market volatility, you can manage the volatility of your portfolio. This is where diversification comes into play.

Average volatility per month © Saxo

Volatility seasonality: what history tells us

The VIX seasonality chart provides a clear pattern: market volatility (measured by the VIX index) tends to spike in the second half of the year, particularly around August, September and October, as geopolitical risks and market-moving events accumulate. This year has followed that trend thus far. However, 2024 brings an additional factor: it’s a U.S. election year, a time typically associated with even greater volatility. As seen in the chart, volatility in election years tends to be higher, especially as the political uncertainty intensifies, adding another layer of risk to an already unstable market environment.

As this trend continues, maintaining a well-diversified portfolio becomes critical. Diversification helps spread risk across asset classes that behave differently, reducing overall exposure to market swings.

Preliminary research: diversified portfolios show signs of outperforming in volatile markets

Recent preliminary internal research on a subset of our clients suggests that diversified portfolios tend to perform better, particularly in uncertain and volatile markets. While the research is still ongoing, the early data from 2024 YTD already points to promising results. Clients with mixed portfolios (combining “domestic” and “foreign” assets) appear to outperform those with more concentrated holdings.

Key insights include:

  • Clients with mixed portfolios have so far exhibited a 79% profitability rate, compared to 74% for domestic-only portfolios and 56% for foreign-only.
  • These diversified portfolios also seem to experience less volatility, leading to higher profit per client and a greater share of profitable instruments.

While this research is not yet complete, it strongly supports the thesis that diversification reduces portfolio volatility and enhances returns during market turmoil. We expect further analysis to deepen these insights.

How to act in difficult market conditions

In challenging market situations, such as crashes and severe market corrections, it’s crucial to follow a thoughtful and strategic approach to protect your investments and potentially take advantage of opportunities. Here are some key steps:

  1. Stay calm and avoid panic selling: Emotional reactions can lead to hasty decisions. Avoid panic selling, as markets often recover over time.
  2. Rebalance and adjust your portfolio: Check if your portfolio still aligns with your long-term goals and risk tolerance. Rebalancing means adjusting your investments to maintain your desired mix. For instance, if stocks have performed well and now make up a larger portion than intended, consider selling some and reinvesting in other assets to restore balance.
  3. Focus on quality investments: Stick with reputable companies that have strong fundamentals. These companies are better positioned to withstand market downturns.
  4. Diversify your investments: Spread your risks by investing in various types of assets such as stocks, bonds, ETFs, and across different sectors and geographies. A well-diversified portfolio is more stable during market volatility.
  5. Maintain a long-term perspective: Focus on your long-term financial goals, looking five, ten, or twenty years ahead. Short-term fluctuations are less critical when you have a long-term investment horizon, as markets tend to recover over time.
  6. Keep cash reserves: Holding some cash provides flexibility and allows you to take advantage of buying opportunities during market declines. Cash reserves also ensure you won’t need to sell investments in case of a sudden expense or emergency.
  7. Consider dollar-cost averaging: By investing a fixed amount regularly, such as monthly or quarterly, you can buy assets at different prices, potentially lowering the average purchase price and mitigating the effects of market volatility.
  8. Review your stop-loss orders: If you use stop-loss orders to limit potential losses, check and adjust them based on current market conditions.
  9. Stay informed: Keep up with news and economic indicators, but avoid overreacting to short-term events that might not reflect the long-term outlook.
  10. Reassess your risk tolerance: High market volatility can test your risk tolerance. If market swings are causing you to lose sleep, it might be a sign that your risk exposure is too high. Adjust your strategy to align with your comfort level.
  11. Focus on strong financial health: Ensure your personal finances are in good shape. Only invest capital you don’t need immediately, so you're not forced to sell during downturns.

Conclusion: diversification is your best defense

Volatility is likely to persist for the rest of 2024, especially with the U.S. election adding to the uncertainty. However, by staying diversified and making strategic adjustments, you can protect your portfolio while positioning yourself to seize opportunities in volatile markets. At Saxo, we offer the tools and platforms to help you build a diversified, resilient portfolio that can thrive in any market condition.

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.