The markets are turning swiftly and suddenly. What was an environment that featured steady economic growth, low unemployment and falling inflation has suddenly turned into a developing panic where investors may be running for the exits. Volatility has spiked and the word "recession" is starting to get used more frequently as investors get worried about stocks.
John Benedict, CEO and portfolio manager for J2 Capital Management, has experienced these types of markets before. His firm specializes in risk-managed strategies and protecting client assets during periods of uncertainty. He sees a number of risks facing the markets during the shift from summer into fall. As he recently told IBD, "seasonality in August is historically a poor month for the markets due to lower trading volumes. The market also has a valuation issue that it will eventually need to recognize and deal with. Also, a potential issue is the timing of Fed rate cuts."
Investors Should Play Defense
Benedict believes that while the latest economic data looks good from an historical perspective, there are a few factors out there that could dampen enthusiasm and increase potential risk.
"While growth is slowing, the economy is still fine. Inflation has receded but is still higher than the Fed target of 2%," he said. "Lastly, we have a U.S. Presidential election in November that appears to be more chaotic and uncertain than any other one in the recent past."
Benedict urges both caution and a comprehensive portfolio review as opposed to panic moves that could damage long-term returns. "Investors will likely want to sit on the sidelines as we head into the election. It makes sense to take some profits, especially in those large technology stocks that have had an exceptional year so far and wait to redeploy after fall," he said. "A good exercise is to review your investments and look at the top holdings of those investments. Many have the same five to 10 top technology stocks as top holdings."
Not surprisingly, Benedict's ETF ideas for this market all lean on the defensive side.
Worried About Stocks? Gold As A Risk Reducer
Gold is traditionally viewed as a safe haven asset. However, its low correlation to equities makes it a great risk reducer within a broader portfolio. Benedict suggests the SPDR Gold Shares Trust as a way to add exposure.
"Historically, gold has tended to be a hedge against inflation, uncertainty and chaos, attracting investors seeking a safe haven," he said. "Sounds like the world we live in."
Outside of market volatility, he also sees rising global debt levels as a good reason to consider adding precious metals. Meanwhile, other global finance trends help gold, too, he says.
"World central banks have been increasing their buying of gold. The U.S. has been on a debt binge for years, raising our deficit to $35 trillion," he said. "There seems to be no desire to slow down our deficits, which are now on pace to be $2 trillion this year. Everything looks to line up for gold in the future."
Getting Paid While You Wait
For years, Treasury bills yielded next to nothing, making them almost no different from stuffing your cash in a mattress. Times have changed after one of the most aggressive Fed rate hiking cycles ever. Treasury bills now offer 5% risk-free yields, which is why Benedict suggests considering the iShares 0-3 Month Treasury Bond ETF .
"In a typical year, on average, you should expect an 8% to 10% return on equities," he said. "Short-term Treasurys, such as SGOV, are still paying over 5% risk-free. You are two-thirds of the way home on those average annual equity returns and taking on none of the risks."
He also notes that there are benefits in keeping some capital on the sidelines in order to take advantage of the dips. "Headed into the doldrums of summer against an overvalued market, you can think of SGOV as keeping dry powder for future opportunities should the market correct heading into the fall," he said.
The Consistency Of Dividends If You're Worried About Stocks
If you're not looking to get out of the stock market altogether, rotating assets within stocks might be a good solution, he says. Dividend stocks tend to have a defensive risk and return profile and can deliver a regular stream of income while you wait. One fund that Benedict points out is the iShares Core High Dividend ETF.
One of the features that Benedict finds attractive is the value tilt of dividend stocks. He notes that value stocks are historically undervalued relative to growth, which could add some lower risk return potential to portfolios.
"We wouldn't suggest avoiding the market entirely this month, but we suggest rotating into stocks that are more reasonably valued, even undervalued, and pay dividends," he said. "HDV currently has a 3.85% dividend yield that allows you to get paid while you wait."
John Benedict
- J2 Capital Management
- CEO and portfolio manager
- Benedict thinks now's a good time to play defense with ETFs due to rising political and economic risks.
