Stock market investors are off to a great start heading into 2024. But gains may be shakier than they look. It may make sense to shore up your portfolio with holdings that can withstand volatility, like dividend stocks and commodities.
The stock market is up more than 10% so far this year, including a 5% gain in May, and the market seems to be taking the rally in stride.
VIX,
The VAT, a common gauge of stock market volatility, rose sharply in May but has since settled at 13, well below its long-term average of 19.
Are investors getting too complacent? Despite what’s on the tape, uncertainty abounds.
Just a few months ago, Wall Street was all but certain the Fed would start cutting interest rates by June. That didn’t happen, and a recent report from Morgan Stanley found there’s little agreement on what interest rates will be at the end of the year, with investors fixated on the results of monthly inflation and employment reports.
And that’s before you even factor in the close presidential election that was rocked last week by former President Donald Trump’s conviction for falsifying business records. “Election uncertainty will likely take center stage through late fall,” Morgan Stanley wrote.
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Bottom line: While the market has not proven particularly volatile so far, it could still be volatile. What’s the difference? An volatile market is one where prices fluctuate widely, both up and down. Fragility is a situation that often leads to volatility. This often happens because traders are nervous, meaning that relatively mundane news can lead to a large, sometimes volatile, price reaction.
According to a recent report from Bank of America, tech stocks have been among the most vulnerable stocks of late.
,
Salesforce and Dell are among the companies whose stocks have seen their biggest historical declines after somewhat disappointing earnings reports. And they’re not alone. Nvidia is
,
Alphabet and Meta seem to have a tendency to overreact to relatively small news, both up and down.
While investors’ anxious reactions have so far been isolated, “the frequency and magnitude of these events — particularly in large stocks — could have a knock-on effect of spreading to increased volatility.”[atility] “This could happen at the stock price level or even at the index level,” Bank of America wrote.
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Rather than becoming frozen like a deer in the headlights, investors need to be prepared to weather or adjust their portfolios to handle the volatility ahead.
One typical strategy Bank of America is currently recommending is buying dividend stocks. Companies that pay regular dividends tend to cushion the market’s biggest price swings because a large portion of their earnings are tied to their yield, and because dividend-paying companies tend to have healthier cash flows and are less speculative.
of
Vanguard High Dividend Yield ETF,
For example, according to Vanguard, they typically only capture about 75% of a bear market’s declines.
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Another avenue Morgan Stanley emphasizes is commodities, which are a natural hedge against inflation and make up a significant portion of the Consumer Price Index. While individual commodities are highly volatile, they tend to rise and fall in value at different times than stocks and bonds, which can help smooth out returns across a portfolio.
“Global reflation, tense geopolitics, particularly in the Middle East, and ongoing fiscal spending suggest the potential for significant rallies in precious metals and industrial-related commodities, including energy,” Morgan Stanley wrote.
Email Ian Salisbury at ian.salisbury@barrons.com
