Placidity has ruled American equities for a long time now, with the S&P 500 Index having gone 6 years without a meaningful pullback. In recent months, this lull has become even more pronounced, with the broader markets being locked in a very tight range. However, we all know that fear doesn't last forever, and neither does complacency.
When markets look markedly serene, some event – such as the so-called Grexit – will crop up, resulting in volatility rebounding. The CBOE VIX index jumped 34% on Monday on Grexit fears as the S&P 500 lost 2.1%. And yet, it remains significantly below its long-term average.
Bull markets are inclined to become more volatile as they age, and this nearly-seven-year-old bull market is well past the average.
The second half of 2015 has a lot of potentially unsettling events lined up, even as curtains are drawn from the ubiquitous Greek drama. Let’s discuss what could make or break the markets in the coming couple of quarters.
The Guessing Game of the Fed Rate Hike
Wall Street continues to play a guessing game over the timing of the first rate hike by the Federal Reserve in almost a decade. The Fed policy statement has done away with all calendar guidance for the same. With June (the former favourite in the guessing game) out of the running, September has emerged as the next best bet for an interest rate liftoff.
The Federal Reserve’s data-dependent approach to interest rate policy indicates that if consumer demand continues to expand over the next quarter, the Fed might set in motion a data-driven shift towards normalization. However, shifting investor sentiment and global developments might continue to complicate the Fed’s stance.
Nonetheless, Fed officials have opined that the recuperating U.S. economy seems strong enough to withstand one or two rate hikes this year.
An Actual Greek Tragedy in the Cards?
Greek Prime Minister Alexis Tsipras snuffed out faint hopes of some bailout accommodation before Sunday's scheduled referendum, as he accused creditors of "blackmail" and appealed voters to reject the offered deal yesterday. While European partners continue to caution that a "NO" vote in the July 7th plebiscite would translate into Greece's exit from the Eurozone, Tsipras assured Greek citizens that it will turn out to be "a decisive step towards a better agreement that we aim to sign right after Sunday's result."
Financial markets the world over have given astonishingly calm reactions to the Greek default, even as hard-line Eurozone members insist that Athens cannot use the threat of contagion to weaker European countries as a bargaining chip in the whole chaotic charade. However, the tranquillity might just be shattered in case Greece is forced to exit the Eurozone, which will spell catastrophe for other European countries on many levels.
Elephant in the Room: China’s Bubble Trouble
Even as Greece dominates the spotlight at present, China’s equity bubble remains a monumental distraction. Over the past one year, the Chinese indices went off-the-charts as its stock market added $6.5 trillion in value. Neophyte traders are getting deluded into believing that recent overwhelming growth will continue in the future. New account openings in China have multiplied 500% in 2015. In May alone, over 12 million new equity trading accounts were opened in China — a figure which exceeds the entire population of Greece.
However, what’s even more concerning is that P/E levels are now eclipsing the insanity of the last bubble.
Moreover, margin debt, which intensifies volatility, is also at record levels. Margin debt has grown over 120% this year to $370 billion. Margin calls amplify selling pressure in downturns, and have the potential to turn market corrections into crashes.
With economic growth at its worst since 1990, the last thing that the Chinese economy needs is a market crash. Then there is the “Contagion Effect” — anything that hampers Chinese growth will set off a chain reaction, and the entire world will feel the reverberations.
Some Respite at Home
Back home, the backdrop looks a lot more upbeat. Recovery in the housing market, consistently improving labor market conditions and buoyant consumer sentiment continue to boost economic growth and brighten the outlook for the economy. Consumer confidence – an important gauge of the economy’s health – improved notably in June, with the Consumer Confidence Index rising to 101.4 in June from May’s reading of 94.6, per the recent Conference Board data.
This positive sentiment will in turn drive consumer spending, which makes up over two-thirds of the U.S. economic activity. To add to the optimism, GDP numbers are widely expected to turn positive hereafter, with the retail sector giving a boost in the latter half of the year.
What remains to be seen is whether equities can absorb an interest rate hike without much disruption to stock valuations. Historically, stock prices have reacted poorly to the first rate hike in a tightening cycle. Thus, the first rate hike might prove to be a crucial deciding factor for the equity market’s trend thereafter.
Beating a Trend-Challenged Market
What we can take away from all this uncertainty is that positive stock market returns in what’s left of 2015 are far from guaranteed. What seems more definite is that there will be plenty of volatility to deal with before these quandaries get sorted out. Thus investors need to hunt for stocks that will hold steady when the broad market starts to blow hot and cold.
A time-tested way to earn stable returns in such times is to invest in low-beta stocks that pay high dividend yields and have good value metrics. Before we handpick the right stocks, let us delve a little deeper into the functioning of the parameters:
Our Screening Metrics
Beta, one of the most commonly-used appraisal measures of a stock’s volatility, measures the tendency of a stock's returns to respond to market swings. For example, the market as a whole has a beta of 1. Therefore, a stock with a beta of less than 1 is less volatile compared to the entire market, while a stock with a beta higher than 1 will have more volatility.
Low correlation stocks provide protection during turbulent times as they are less prone to day-to-day fluctuations
The other parameter, dividend yield, assesses the amount of income received in proportion to the share price. In capricious times such as now, it could be a smart strategy to buy stocks that yield good dividends, thus ensuring a steady income.
To further refine our screen, we took the assistance of our new style score system, and zeroed in on stocks that have a top Value Style Score of “A.” These stocks have bright prospects, and their attractive valuations serve as a perfect opportunity for investors to jump in and ride the anticipated growth.
Please note that the Zacks Style Score for value takes into account all valuation metrics to give us an actionable metric that helps identify stocks truly trading at a discount to intrinsic value. Back-tested results show that stocks with Style Scores of ‘A’ or ‘B’ when combined with Zacks Rank #1 (Strong Buy) or #2 (Buy) handily beat other stocks.
Flaunting a solid Zacks Rank and Value Style Score, these low-beta dividend stocks are great bets to ride out the impending volatility.
4 Prominent Picks
Sprague Resources LP SRLP operates as suppliers of energy and materials handling services. The company stores, distributes, and sells refined petroleum products and natural gas. The company holds a Zacks Rank #2 and boasts a Value Score of ‘A’. With a dividend yield of 7.5% and a beta value of 0.59, this stock looks to a great buffer for your portfolio in uncertain markets.
Hatteras Financial Corp HTS is an externally-managed mortgage real estate investment trust. It invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or U.S. Government-sponsored entities. Hatteras Financial holds a Zacks Rank #2 and possesses a Value Style Score of ‘A.’ The company has a great dividend yield of 12.1% and has a beta value of 0.34.
SSE plc SSEZY is engaged in the generation, transmission, distribution and supply of electricity in the United Kingdom and Ireland. The company is based in Perth, U.K. This Zacks Rank #1 company has a Value Style Score of ‘A.’ The company offers a promising dividend yield of 5.6% and has a beta value of 0.66.
AGL Resources Inc. GAS focuses on distributing natural gas to customers in Georgia and part of Tennessee. The Zacks Rank #2 company boasts a Value Style Score of ‘A’. This low volatility stock carries a beta of 0.28, and doles out 4.4% in dividend yield as well.
The Bottom Line
"Wise men are not always silent, but they know when to be." Same goes for stocks!
So calm those jitters, take a back-seat and enjoy an arm’s-length view of the rollercoaster ride that seems to be today’s market trend, while these low-beta value picks will silently lend strength and protection to your portfolio in the second half of a volatile year.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment