Lord Abbett: Investing In Volatile Markets

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%.

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.

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.

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.

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.