What can we expect for asset returns when the dust settles?Whatcanweexpectforassetreturnswhenthedustsettles?

Market volatility brought on by the impact of COVID-19 has sparked vigorous debate among investors: What happens when the dust settles? Specifically, how may stocks and bonds perform after the volatility subsides? Is asset class performance leading into a spike in volatility different than after?

A new paper from PGIM’s Institutional Advisory & Solutions group (IAS) addresses these questions, using statistical models to measure how asset classes have performed “after the dust has settled.” The paper, “When the Dust Flies: How Volatility Events Affect Asset Class Performance,” examines 26 volatility spike events and 25 post-peak events across a 68-year span, in a variety of market environments to determine what “normal” may look like once we emerge from the pandemic.

The findings? While volatility spike events produce large negative returns for equities and credit bonds (with positive returns for Treasuries), markets recover relatively quickly, generally about seven months after the spike. Once volatility has smoothed out, equity and credit markets tend to perform well, often better than before the triggering event.

“Our findings support investors who intend to ‘stay the course’ following a volatility event,” says Bruce Phelps, head of IAS. “We’ve also seen investors use volatility spikes as opportunities to rebalance their portfolios in excess of their policy weights to risky assets.”

 

For an in-depth analysis, read “When the Dust Flies: How Volatility Events Affect Asset Class Performance,” and see PGIM’s webinar for institutional investors.