Growing volatility in stocks is driving a search for defensive assets, though investors may have fewer places to hide this time around.
Wall Street’s most closely-watched measure of investor nervousness, the Cboe Volatility Index, on Friday hit its highest in nearly seven months, as the S&P 500 slid for the week. The benchmark stock index is down 8% from late July, when it hit its high for the year, though still up 10% year-to-date.
Assets that can help investors weather the storm may be in short supply. Equity sectors such as utilities and consumer staples, popular with nervous investors when markets grow choppy, have been swept up in the S&P 500′s recent decline.
The Japanese yen stands at its lowest against the dollar in about a year. U.S. government bonds are on track for an unprecedented third straight annual loss, with yields on the benchmark 10-year Treasury - which move inversely to bond prices - at their highest since 2007.
That has left investors piling into other traditional safe-haven assets such as the dollar and gold, as well as short-term debt.
Nevertheless, “it is no doubt a challenging environment for well-diversified portfolios,” said Angelo Kourkafas, senior investment strategist at Edward Jones. Of Treasuries, he said, “We have this safe haven asset class that is not necessarily at the moment getting any bid or providing much safety from that volatility of the headlines.”
Investors have plenty of reasons to be jumpy. Rising bond yields have dampened risk appetite, raising the cost of capital for companies and offering investment competition to stocks. Federal Reserve Chairman Jerome Powell last Thursday said the stronger-than-expected U.S. economy might warrant tighter policy.
Fears that the conflict in the Middle East will widen have made traders more anxious, while a weaker-than-expected earnings report for Tesla last week also darkened the mood.
Volatility in stocks has been accompanied by increased gyrations in the Treasury market. The MOVE index, which measures expected volatility in U.S. Treasuries, stands near a four-month high.
“When rates are increasing at the rate they are and the geopolitical situation is what it is, now you are getting a bid to volatility,” said Brent Kochuba, founder of options analytics service SpotGamma.
This week will be busy for markets, with earnings due from Microsoft, Alphabet, Amazon and Meta Platforms - four of the seven U.S. megacap stocks whose gains have powered the S&P 500 higher this year while the rest of the index has lagged.
The index’s defensive sectors have been battered this year, with utilities down about 18%, consumer staples off nearly 9% and healthcare down roughly 6%, partly because higher yields on Treasuries have dulled their allure.
“Safe-haven assets have not performed as expected in response to conflicting growth data and elevated geopolitical tensions,” analysts at UBS Global Wealth Management wrote on Friday.
Investors still have some portfolio hedges. Prices for gold have soared 8% since the conflict between Israel and Hamas broke out this month.
In currencies, the Swiss franc, a longstanding safe haven asset, stands near its highest level against the euro since 2015. The U.S. dollar is up 5% in the last three months.
Some investors are moving to short-term Treasuries or money-market funds, which are providing more attractive returns since interest rates began rising early last year.
“There are certainly plenty of investors who ... at 5% plus rates on completely liquid Treasury bills are willing to park there while they await some clarity on inflation and on the economy,” said Rick Meckler, partner at Cherry Lane Investments.
To buffer against bond market volatility, UBS analysts said they preferred five-year duration relative to 10-year “to earn yield and to mitigate the risk that 10-year yields continue to rise.” They also recommended hedging against a widening conflict in the Middle East by taking long futures positions on Brent crude oil.
-- Lewis Krauskopf, Reuters
Also see:
Billionaire investor Bill Ackman says it’s too risky to remain short bonds
Strong ad sales, stable enterprise spending wind beneath Big Tech earnings
Dip buyers flock to Tesla Bull ETF amid stock selloff
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Stocks to ponder
Enbridge Inc. (ENB-T) In the past 16 months, the pipeline operator’s shares have lost more than one-quarter of their value as dividend stocks of all kinds have been hammered by surging interest rates and fears of slowing economic growth. As Enbridge’s shares have slumped, its dividend yield has climbed to more than 8 per cent. Given Enbridge’s outsized yield, it’s reasonable to ask: Is the dividend safe? John Heinzl provides his thoughts.
Endeavour Mining PLC (EDV-T) With its corporate head office located in London, England, Endeavour Mining is a gold producer with operations in West Africa. The share price has rallied 16 per cent over the past 10 trading sessions. Twelve of 14 analysts call the stock, which has a dividend yield of 3.7 per cent, a buy. Jennifer Dowty looks at the investment case.
The Rundown
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Beating the stock market isn’t easy. Many Canadian investors act like it is
The likelihood of an investor picking one of the few funds that generates market-beating returns is remote. But as Tim Shufelt reports, that doesn’t seem to stop multitudes of Canadians investors from trying to beat the odds, and paying dearly for it.
Canadian banks are cutting jobs. For investors, that could be good
Last week, Bank of Nova Scotia said it will terminate 3 per cent of its global work force, or about 2,730 jobs based on 2022 payroll numbers. For sure, an announcement of mass layoffs at a Canadian bank is bad news for employees. But as David Berman tells us, for investors it might not be such a bad thing.
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
Ask Globe Investor
Question: Now that we are both retired, the management of our funds is more complex, and while I do need support, I feel quite apprehensive to trust our hard-saved retirement funds to someone who in the end has to answer to their own company/managers. Is there some advice that you can offer to help provide reassurance on using financial advisers?
Answer: Here’s some advice on finding good advice: prepare for a slog in finding an effective and trustworthy adviser, but expect to be rewarded when you find someone suitable. Good advisers are out there. I’ve met them face to face. I’ve interviewed them and quoted them in columns because they are knowledgeable, ethical and personable.
A plan for finding the right person: build a list of potential advisers and then interview them to see if they’re the right fit. Find advisers by talking to friends and family to see if they have an adviser they would recommend. Also try a directory of financial planners, advisers and coaches put together by financial blogger John Robertson. Note: some people on this list do planning only, while others additionally provide portfolio management services.
Key questions to ask in interviewing prospective advisers:
- Do you provide the specific services I need, such as a strategy for converting retirement savings into income, as well as tax and estate planning?
- What kind of investment products do you use?
- Based on my preferred risk level, how in general terms would you build a portfolio for me?
- How would you protect my portfolio against a stock market correction, recession, inflation and other risks?
- How many clients do you have who are similar to me, and what services are you providing for them?
- Is my portfolio of sufficient size to enable you to provide the services I want?
- What are your fees, in both percentage and dollar terms as applied to my situation?
- What accreditation do you have as an adviser, and how long have you been in the business?
A few years ago, I put together a checklist to help assess whether people are getting value from their advisers. It may help inspire some questions to ask prospective advisers.
There are lots of reasons why a relationship with an adviser doesn’t work out for clients. One of them, let’s face it, is that they didn’t put enough work into finding the right adviser. Don’t settle for someone. Keep slogging.
--Rob Carrick (Send questions to RCarrick@globeandmail.com)
What’s up in the days ahead
Bank of Canada expected to hold interest rates this week as inflation slows
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Compiled by Globe Investor Staff