There’s no shortage of risks spooking investors these days.
Today, I’ll show you why the best offense is a good defense.
Between inflation, rising rates, Fed tightening, the war in Ukraine and a fresh COVID crackdown in China, it’s ugly out there!
But believe it or not, plenty of stocks are doing well. You just need to know where to look. Today, I’ll show you how to get the most out of this challenging market.
To kick things off, I’ll go over which sectors are winning and why. Then I’ll use MAPsignals data to show you how to play it with a best of breed, high-yielding ETF that’s generating big returns in a down market.
The Best Offense is a Good Defense
It rarely pays to get too defensive in the stock market. Most of the time you’ll just watch the parade go by. But recessions are the exception. They spark bear markets because they dent earnings by an average of 25%. Bear markets are worth sidestepping. Since 1929, the median S&P 500 bear market drop was 33% lasting 25 months (chart).
No one has a crystal ball. A recession and a bear market may not happen. But the risk is clearly on the rise. The cheapest time to buy insurance is before it’s obvious you need it.
Above, you’ll see that there’s been 15 declines of 20% or more in the market since 1929. The median time to the low is 14 months, while the median time to full recovery is just over 2 years at 25 months.
Here’s your bear market playbook:
With inflation above 8% you’ll lose big money holding too much cash. Instead, target stocks best positioned to generate positive returns in a challenging macro environment. The best offense is a good defense!
- Focus on high-quality dividend payers that are much less volatile than the S&P 500 Index.
- Target inflation fighters with pricing power in the energy, materials, and real estate sectors
- Seek out safer sectors like consumer staples, health care and utilities that consistently outperform during downturns because their profits are less sensitive to the economy’s ups and downs.
- Keep an above average cash reserve you can use to leg in to cheap, blue chip growth stocks as they decline. Over the long run, you’ll be glad you did!
How to Play It
There are thousands of ETFs out there. Finding the right one can seem overwhelming. The good news is I used MAPsignals to find an ETF that targets exactly what you need to make money in this tough market.
Forget index ETFs and mutual funds. They don’t offer much protection when things turn ugly. That’s because the sectors best positioned to weather the storm only make up 32% of the S&P 500. Inflation fighters like energy, materials, and real estate only total 9% of the S&P, while safer sectors like staples, utilities and health care only add another 23%.
To earn returns high enough to stay ahead of inflation while also limiting your downside, you need a blue-chip basket of low volatility stocks that also pay big dividends. That’s a tough combination to find in one ETF. While there are plenty of well-established ETFs that target either high dividends or low volatility, only one targets blue chips with both attributes.
The Invesco S&P 500 High Dividend & Low Volatility ETF, ticker SPHD, fits the bill perfectly. It targets the 50 least volatile, high yielding companies in the S&P 500 Index. I used MAPsignals ETF ranking process to screen it across key fundamental and technical metrics, and it scored a healthy 59.
Below are the other key positives that jump out at me for this fund.
- Making fresh all-time highs; generated its latest big money buy signal on April 7
- 3% annual returns since 2012 inception with 40% less volatility than the S&P 500
- Juicy 3.5% annual dividend yield with monthly payouts; 5% annual dividend growth since inception
- Low 0.3% expense ratio
- Liquid – $3.5B is assets with 1.3M shares of average daily trading volume
And while this is all fine and dandy, the fund has a massive 81% weighting in sectors with the strongest MAPsignals scores: energy, materials, utilities, staples, health care and real estate.
Check out this chart of SPHD. It’s making new all-time highs in this brutal market. Not many diversified portfolios can say that. It’s an important reminder that if you target the right sectors and stocks, you can make money in any market. The best offense is a good defense.
Bringing It All Together
Recent volatility could linger if 8% inflation doesn’t cool soon. The Fed may have to hike rates far higher than the 3.25% Wall Street currently expects. That could tip the economy into recession, hammering earnings.
No one has a crystal ball. But the risk of a recession is rising. That doesn’t mean panicking out of stocks. Instead, make room for some portfolio insurance. High dividend and low volatility are the two best performing stock factors YTD – both are solidly positive.
SPHD offers a low-cost, high yielding way to reduce risk. And our ranking process agrees! And remember, in this murky macro environment, the best offense is a good defense!
Alec Young is an investment strategist, working on Wall Street since 2005. He currently serves as CIO at Tactical Alpha LLC.
Prior to TA, Alec spent 15 years in senior investment strategist roles at major financial firms. Most recently, he served as FTSE Russell’s Managing Director of Global Markets Research. Prior to that, he was VP & Investment Strategist at Oppenheimer Funds and served as Global Equity Strategist at S&P Global.
See his full bio here.