Stock market investors have enjoyed a great start to 2024. But gains may be more fragile than they look. It might make sense to fortify your portfolio with holdings that can guard against volatility, such as dividend stocks and commodities.
The stock market is up more than 10% so far this year, including a 5% gain in May. Markets seem to be taking the gains in stride. The
a popular measure of stock market volatility, spiked in May but has since settled to 13, well below its long-term average of 19.
Could investors be getting too complacent? Despite what the tape says, there is plenty of uncertainty out there.
Just a few months ago, Wall Street was all but certain the Fed would start cutting rates by June. That hasn’t turned out to be the case. Instead, notes a recent
report, there’s little consensus on where rates will be at the end of the year, and investors have been hanging on the results of monthly inflation and jobs numbers.
And that’s before you consider the neck-and-neck presidential election that just last week got a jolt when former President Donald Trump was found guilty of falsifying business records. “Election uncertainty will take center stage into late autumn,” writes Morgan Stanley.
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The upshot: While so far the market hasn’t been proven particularly volatile, it may still be fragile. The difference? A volatile market is one where prices yo-yo back and forth. Fragility is a circumstance that often leads to volatility. Often occurring because traders are on edge, it means relatively mundane news can lead to big, sometimes erratic price reactions.
Tech stocks have been some of the most fragile lately, according to a recent note from
with stocks like
and Dell both making historically outsize declines on mildly disappointing earnings news. They aren’t the only ones:
Nvidia
,
and
have also had a tendency to seemingly overreact, both up and down, to relatively minor news.
While investors’ jittery reactions have so far remained isolated, “the frequency and magnitude of these events (particularly in the largest stocks) could spill over into higher vol[atility] at the stock and even possibly the index level,” Bank of America writes.
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Rather than freeze like a deer in the headlights, investors need to be prepared to either ride out coming volatility or position their portfolios to cope with it.
One classic strategy, which Bank of America currently recommends, is buying dividend stocks. Companies that pay regular dividends tend to soften the market’s biggest price swings in part because a chunk of their returns are tied to yield, and in part because companies that pay dividends tend to have healthy cash flows, making them less speculative.
The
Vanguard High Dividend Yield ETF,
for instance, typically only captures about 75% of bear market declines, according to Vanguard.
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Another route, this one highlighted by Morgan Stanley, is commodities. These represent a natural hedge against inflation, making up a significant chunk of the consumer price index. While individual commodities can be highly volatile, they tend to rise and fall at different times than stocks and bonds, meaning they can still help smooth returns for you overall portfolio.
“Global reflation, tense geopolitics, especially in the Middle East, and ongoing fiscal spending suggest decent upside potential for precious metals and industrial-related commodities, including energy,” Morgan Stanley writes.
Write to Ian Salisbury at ian.salisbury@barrons.com
