Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
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.
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.
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.
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:
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.
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:
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.
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