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Market Volatility? Let Us Help You Navigate

Sep. 21, 2021 12:38 AM ETSPY
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September has been following its historical pattern of being a rather poor month for the market. The S&P 500 in the month of September has declined an average of 1%. This could be exaggerated as the broader index hasn't experienced a market pullback or correction since last year. That could mean we are primed for downside pressures as investors are looking for a reason to sell.

A market pullback is typically considered when the averages decline 5 to 10%. A correction would be classified as a 10 to 20% decline from highs. Declines of greater than 20% would put us in a technical bear market.

Pullbacks happen fairly frequently. Going back to 1945 there have been 84 pullbacks in the 5 to 10% range. 29 declines in the 10 to 20% range and bear markets are fewer occurring 9 times since 1945. 40% declines or more, while not having a technical name applied to it (maybe we can call it a double bear market,) have happened 3 times since that same year.

(Source - Guggenheim)

As we can see above, the time to recover is quite swift for these smaller pullbacks. Then the time for recovery increases further the deeper the declines. Another important consideration is that it takes less time for the declines to happen relative to the time it takes to recover.

The S&P 500 is down nearly 4% already this month now. This is measured by the S&P 500 SPDR ETF (SPY) in the chart below.

ChartData by YCharts

We've certainly seen a volatile tick-up as the VIX is heading higher. Market moves on September 20th really ramped this up. VIX is the measurement for CBOE Volatility Index. It measures stock market's expectation for volatility based on the S&P 500 options. The higher that goes, the more investors will expect volatility. The chart below goes back 3 years to show last year's significant increase as March 2020 took over the market. We are still down considerably from that level but we have moved sharply higher this month now.

ChartData by YCharts

For closed-end funds, all of this can add up to even more significant volatility. This is due to the price not being tied to the actual underlying net asset value. That is what opens CEFs up to discounts and premiums. In market sell-offs, we typically see discounts widen out significantly.

As we've been in recovery mode, we've seen the opposite. Discounts have become very narrow. In fact, discounts have only been more narrow 10% of the time going back to 1996, according to RiverNorth.

(Source - RiverNorth)

This wasn't equal across asset classes though. Fixed-income CEFs in both the taxable and muni space have now approached an average premium across the board.

(Source - RiverNorth)

While at the same time, equity funds remain stuck in discount mode. Though the discounts have tightened considerably from what they were average at the end of 2020. That is for both equities and fixed-income CEFs.

(Source - RiverNorth)

In this time of volatility, you can let the CEF/ETF Income Laboratory help you navigate through the volatility. In fact, our double-compounding strategy can generally work even better during tumultuous times as discounts tend to diverge more frequently.

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