3 Low-Volatility Stocks To Ride Out The Market Collapse

Stocks in the S&P 500 plunged 9% through last week for the worst October since 2008, and both the broad index and the Dow closed into negative territory for the year. The sell-off is worse in individual sectors like industrials and materials, down 14% and 21% from their respective 52-week highs.

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The market’s fear gauge, the VIX Volatility Index, spiked just past 26 to highs not reached since the February correction. Before October, the VIX had not risen above 16 since April and has traded in a tight range for most of the year.

While the very definition of volatility is moves to the upside as well as those red-days, the trend is clearly to a lower market.

The economy continues on a fairly stable footing but negative forces have taken hold and the market rout is likely not over.

#-ad_banner-#There may be just one place to take shelter when market volatility explodes, one group of stocks to protect your money from the next leg lower.

Has The Next Bear Market Just Begun?
Stocks have climbed a wall of worry for years but have always managed to climb higher. That upward progress seems to have run face first into the wall over the past several weeks and investors are rightly asking if that’s it for the longest recorded bull market.

Perhaps just as worrying is that there has been no catalyst to the sudden selloff. Major themes like higher rates, the developing trade war and a potential earnings peak have weighed on stocks but there have been no headline shocks to send the market into such panic.

That could be a signal of a tired market looking for a reason to correct lower.

The market isn’t likely to get much of a reprieve either. Those three major catalysts are likely to get worse before they get better.

The Federal Reserve continues to signal one more rate hike this year and three in 2019. Tariffs on $200 billion in Chinese imports are set to increase from 15% to 25% in January with neither side looking willing to negotiate. Companies in the industrials and materials sectors have warned that input inflation has threatened forward earning guidance, a factor that is likely to flow through manufacturing and finally to consumer goods as well.

None of this necessarily preludes the coming of a bear market. While earnings growth looks to be slowing, it’s still growing by 20% on a year-over-year basis for companies in the S&P 500. Monetary policy at the ECB and the Bank of Japan is still stimulative and the Federal Reserve could reverse course if economic growth slows.

Whether this market rout turns into a full-blown bear doesn’t mean investors want to stand there, waiting to get mauled and it doesn’t mean there won’t be losses. When market volatility starts blinking red, investors may want to look to historically low-volatility stocks for a reprieve.

Positioning In Low-Volatility Stocks For Protection And Growth
The worst thing investors can do is panic as prices fall, taking losses and then waiting too long to get back into the market. A better strategy may be to position in low-volatility stocks for relative returns while the market works through a rough earnings season.

Three of the top five performing funds tracked by Morningstar in October have been low-volatility funds, composed of non-cyclical and dividend stocks. Top among these was the Legg Mason Low Volatility High Dividend ETF (NYSE: LVHD), down just 1.4% in October and sporting an attractive 3.6% yield.

I researched the fund for its best performers and potential safety plays as investors ride out what could be a tough end to 2018.

Procter & Gamble (NYSE: PG) is up 9.9% in October and one of the fund’s top holdings at 2.79% of assets. The consumer staples giant has recently broken free of the weak sales trend in the sector with 4% year-over-year sales growth in the fiscal first quarter. Four out of five segments posted sales growth in the mid- to high-single digits.

P&G is a powerhouse in things people buy every day with commanding market share like 25% in the baby care segment, 65% of the market for razor blades and 25% of fabric care. The company recently finished a multi-year effort to cut from 100+ brands down to a core of 65 or fewer. Another $10 billion in cost cutting is still expected that could drive margins even in recession-induced sales weakness.

The shares pay a 3.3% yield and trade for 20.9 times trailing earnings.

Verizon Communications (NYSE: VZ) is higher by 5.1% for the month and the fund’s largest holding at 2.88% of assets. The company dominates the post-paid market for telecom subscribers with a 40% share, a scale advantage over all other competitors.

Verizon added nearly 300,000 net subscribers in its third quarter, the best performance in three years. Besides this gain in net additions, revenue per subscriber also increased for the second quarter in a row. Consumers aren’t likely to drop their phone plan, even in the worst of times, and the company could get a boost with the upcoming adoption of 5G technology.

The shares pay a 4.3% yield and trade for just 12.5 times trailing earnings.

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Public Service Enterprise (NYSE: PEG) is up 3.7% so far in October and accounts for 2.5% of the fund’s assets. The regulated utility provides power and services through the mid-Atlantic and Northeast with service across 75% of New Jersey.

Public Service Enterprise is more highly diversified than most utilities with an energy investment firm alongside the regulated energy infrastructure. The traditional utility segment provides cash flow to make opportunistic investments in clean energy projects for upside potential you don’t see in pure-play utility companies.

The company recently reached a rate agreement in New Jersey that was marginally higher than expected. Shares pay a 3.3% yield and trade for 18.3 times trailing earnings.

Risks To Consider: Low-volatility, non-cyclical stocks may underperform if the market comes roaring back for gains. Watch for signs that market weakness is turning to strength to position for growth again.

Action To Take: Position in low-volatility, typically non-cyclical stocks to ride out the weakness in investor sentiment and stock prices to keep from panicking and making bad investment decisions.