Investing for volatile times
Investors still seem to be contending with the anticipated backdrop of an uncertain market future for the next couple of months. We don't foresee new price weaknesses morphing into any major market meltdown in the coming months, but we do expect investors will still need to contend with some sporadic volatility this year as we make our way into a new bull market.
I wanted to suggest an investment approach that can somewhat shelter you from the coming “shakeups” in 2021. When yields are likely to stay low and markets have a tendency to have future volatility, revisit dividend strategies. Start moving more investments toward high-quality dividend payers and high-quality growth-name stock picks.
This has been a valuable strategy in this type of environment, especially given the “lower for longer” interest rate road put in place by the U.S. Federal Reserve and the Bank of Canada (a freeze on rate hikes until 2024).
Lower interest rates have always typically benefited dividend investing and a good dividend-focused strategy helps to combat elevated market volatility. When it comes to growth stocks, lower interest rates always tend to support higher valuations. This strategy will limit your losses in market declines but also perform well during periods of market strength — something we expect in the next three to five years as we anticipate a new bull market after COVID-19.
Remember that price swings will occur in both directions this year, and while we never want to lose money, corrections often represent healthy and necessary periods during a new bull market. The next six months will have many market corrections. If you look back at the historicals of the S&P 500, market performance tends to rebound quite quickly once corrections have fully run their course. For example, a review of market drops and corrections of the S&P 500 from June 1948 to September 2020 demonstrates that in three-, sixand 12-month categories, after hitting the correction troughs in the market, on average the rise was 15.6 per cent, 22.1 per cent and 29.5 per cent, respectively.
Also remember that when you analyze the beginning of a bull, performance tends to flatten out after the first three-month burst, before the next gain. Investors should stay put and not be too nervous or concerned about selloffs and uptick volatility.
There will be some unexpected volatility that will at times remain elevated in the coming months as investors continue to doubt the validity and sustainability of the bull. With the low rates and elevated volatility levels, the 2021 market landscape provides an opportunity for investors to selectively increase exposure toward dividend-paying stocks. Ask your adviser if this is something you should consider.