Investing in Volatile Markets: Four Things to Remember

In Brief

Investors have experienced meaningful market volatility in the wake of the April 2 tariff announcement by the United States and subsequent retaliatory actions from U.S. trade partners.
Equity market volatility has been a common occurrence over the years, but the U.S. stock market (as represented by the S&P 500® Index) has weathered several negative events in the past four decades and posted double-digit annual returns.
Previous episodes of panic-driven selling of equities would have caused investors to miss out on the market’s strongest days, lessening returns over the long term.
Taking a broader view, we believe a diversified approach—for example, finding a strategic balance among stocks, bonds, and short-term assets—could help investors ride out future periods of market volatility.

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Global financial markets have experienced volatility in the past several days, given the uncertainty of the impact of the broad-based tariffs on U.S. trading partners announced on April 2 and the retaliatory responses from several nations. We all know that markets do not like uncertainty. But while we don’t know when, or how, the situation might change for the better, we do know some important things about how the market has responded to prior episodes of volatility.

1. Market volatility is not new

Amid the scary headlines, it is important to remember that market volatility is normal. In fact, pullbacks of 10% or more typically happen every year or two.

Look at Figure 1. Market data dating back to 1980 show there is typically a pullback each year (on average about a 14% drawdown). But in most years, the market has ended up positive, with an average return of 14%.

Figure 1. Significant Drawdowns Do Not Always Mean Negative Returns for a Given Year

S&P 500 Index annual total returns versus maximum total decline, as of December 31, 2024

Source: Morningstar.
The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Past performance is not a reliable indicator or guarantee of future results.

2. The market has been resilient following prior crises

While the potential for global trade friction is concerning—and the impact difficult to predict—we think it’s worth noting that the market has weathered other negative events in the past several decades. Figure 2 shows how the market has performed through a series of disruptive events since 1980.

Figure 2. For Investors, Perseverance Has Paid Off over the Decades

Value of $10,000 invested in the S&P 500 Index on January 1, 1980 (through April 4, 2025)

Source: Bloomberg and Lord Abbett.
The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Past performance is not a reliable indicator or guarantee of future results.

Despite these short-term market setbacks, which has included wars, global pandemics and, yes, trade wars, a $10,000 investment in the S&P in 1980 would now be worth nearly $1.5 million.

3. It’s not “timing the market,” it’s time in the market

Periods of volatility can be alarming and may cause some investors to flee the markets to preserve capital and then try to reenter the market at the most “opportune” moment to rebuild wealth. For such a market timing strategy to be successful, it would require an ability not only to correctly forecast the future negative days, but then also correctly time the market bottom. History has proven this to be a very costly strategy for those who do not have perfect foresight.

Why? Investors who try to time the market around volatility risk missing out on the potential long-term returns of the market. Figure 3 illustrates the growth of $10,000 in the S&P 500 for investors who missed the 10, 20, and 30 best days of market performance in the past 27 years.

Figure 3. This Is What Happens to Your Portfolio When You Miss the Market’s Best Days

S&P 500 annualized returns and growth of $10,000 for the period January 1, 1998–December 31, 2024

Source: Morningstar, Standard & Poor’s. The “best” days to be invested are defined as the days on which the S&P 500 Index delivered its highest returns for the given periods based on historical data. Annualized returns are measured based on the S&P 500 Index. “10K Invested” depicts the value of a hypothetical $10,000 investment in the S&P 500 Index from January 1, 1998, through December 31, 2024. Note: The historical data are for illustrative purposes only and do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment and are not intended to predict or depict future results. Hypothetical results have not been achieved by any individual investor. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Past performance is not a reliable indicator or guarantee of future results.

4. Diversification Is Crucial

While equity market volatility tends to get most of the headlines, we know that it is prudent for investors to hold a diversified portfolio of stocks, bonds, cash, and other assets. The past few weeks have illustrated that high-quality bonds can offer diversification from equity market volatility. As often happens when recession fears spike, U.S. Treasury yields have dropped amid a flight to quality, and high-grade bonds have rallied.

What about cash or equivalents like money market funds or T-bills (U.S. Treasury bills)? Investors should always have some cash for their short-term liquidity needs, but cash does not provide the same level of diversification. High-quality bonds can appreciate in price, as their duration benefits from falling Treasury yields. But cash cannot appreciate—it simply gets reinvested at lower yields as rates fall. High levels of cash will not allow investors to reach their long-term goals.

Equity market volatility can also lead to volatility in the credit markets. In recent days we have seen meaningful daily widening in credit spreads. Such episodes often create very attractive entry points (see Figure 4). Market volatility is uncomfortable in the near term, but history has proven that such volatility has offered great opportunities for active managers to navigate.

Figure 4. Large Moves in Credit Spreads Are Not Uncommon

Largest one-day spread moves and subsequent one-year forward return from those dates of the ICE BofA U.S. High Yield Index since September 2001

Chart showing Largest one-day spread moves and subsequent one-year forward return from those dates of the ICE BofA U.S. High Yield Index since September 2001

Source: Bloomberg, ICE BofA Indices. Data as of April 3, 2025.
Note: The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Past performance is not a reliable indicator or guarantee of future results.

A Final Word

Here are two other concepts we think investors should keep in mind during periods of market tumult:

Stay focused: Volatility can be difficult to live through—no one knows how long it may persist. But volatility often can create opportunity. As we have noted many times, short-term market dislocations, such as the ones experienced in April 2025, may create attractive entry points in key asset classes and allow for active managers potentially to take advantage of opportunities.

Stay calm: News headlines may be alarming, but long-term investors have weathered scary times before. Rather than reacting to short-term market moves, it may be more important to make sure your asset allocation is appropriate for your time horizon and risk tolerance.

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Glossary & Index Definitions

A basis point is one one-hundredth of a percentage point.

Diversification is the spreading of investments both among and within different asset classes and is an important tool in managing investment risk.

A drawdown is an investment term that refers to the decline in value of a single investment or an investment portfolio from a relative peak value to a relative trough.

A money market fund is a type of mutual fund that invests in low-risk, short-term debt instruments. They are intended as a short-term, liquid investment.

Spread is the percentage difference in current yields of various classes of fixed-income securities versus Treasury bonds or another benchmark bond measure. A bond spread is often expressed as a difference in percentage points or basis points (which equal one-one hundredth of a percentage point). The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option. Typically, an analyst uses the spread versus Treasuries.

Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes. Treasury bills are U.S. Treasury securities with a maturity range of 4 weeks to 52 weeks.

ICE BofA U.S. High Yield Index tracks the performance of U.S. dollar-denominated corporate debt that is rated below investment grade and publicly issued in the U.S. domestic market. This index includes bonds with a fixed-coupon schedule and a minimum outstanding amount of $100 million.

ICE BofA Index Information:

Source: ICE Data Indices, LLC (“ICE”), used with permission. ICE PERMITS USE OF THE ICE BofA INDICES AND RELATED DATA ON AN “AS IS” BASIS, MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE ICE BofA INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THE USE OF THE FOREGOING, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND LORD ABBETT, OR ANY OF ITS PRODUCTS OR SERVICES.

The S&P 500^®Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

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Equity Investing Risks

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.

Fixed-Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price.

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