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Markets

How to Prepare for Volatility and a Possible Recession in 2019

Investors should be ready for a bumpy ride. One step concerned investors can take to ramp down risk could be to buy into a stock market index that offers more stability than the S&P 500: the S&P 500 Low Volatility Index.

Trade wars, government shutdowns, Brexit. About the only thing market watchers can predict with any certainty about 2019 is that we are in for more surprises, and that means high volatility in the new year. For the average investor, this is a terrifying state of affairs.

Making matters worse, speculations of a recession in 2019 has investors up at night. Many think that, after more than nine years, the bull market has been played out. The two 10% corrections seen in 2018 indicate this thinking is becoming more widespread. Some take the inversion of the yield curve during the first week of December as confirmation that a recession is coming.

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An inverted yield curve occurs when investor uncertainty pushes the yields on long-term treasuries below short-term treasury yields. Though a yield curve inversion doesn't mean a recession is imminent, investors consider it a reliable leading indicator of trouble ahead.

Whether or not a recession materializes, investors must expect high volatility through 2019. Now is the time to rebalance your portfolio. The goal is to minimize exposure to the downturns while setting yourself up to profit when volatility works to your advantage.

Strategies for a volatile 2019

Investors have enjoyed fat profits in growth stocks over the past decade. These volatile investments outperform more stable stocks in bull markets, but they also go south very fast when trouble starts. Amazon (AMZN), for example, has relentlessly grown and became like a money machine for investors. When the market turned south last autumn, Amazon tanked. Investors who failed to take profits earlier in the year had a reason for regret.

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The environment of 2019 will require a different outlook than when owning the FAANG stocks (which stands for Facebook, Amazon, Apple, Netflix and Google’s parent, Alphabet) was a sure way to beat the market. In this new environment, value stocks will be the ones that outpace the S&P 500. Low-volatility instruments are now primed to increase in value as investors rebalance their portfolios. Value stocks and low-volatility instruments may serve as a hedge for investors to consider if they expect more volatile investments to tank.

Seek professional advice

Financial advisers understand the products that are designed to perform well during volatile markets. A qualified investment adviser can help to provide access to products that are suitable for your specific risk tolerance.

Annuities and bull spreads are good examples, as they contain hedging components. In bad times, their smaller returns look a lot better than the crash of the highfliers.

It's not all doom and gloom

It's easy to lose perspective when high volatility continually shocks the markets. Though the S&P 500 has enjoyed a 333% gain since the 2009 start of the bull market, its gain is still below the dot-com boom's 417% gain.

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Jeff Saut, the chief investment strategist at Raymond James predicts another 10 years of bull market gains, though he fully expects a number of short-term pullbacks. "That's usually how bottoms are formed," he said in an interview on CNBC. He expects the market to bottom and then surge to new all-time highs during earnings season.

The bottom line

The year 2019 is unlikely to sail along smoothly. There is just too much uncertainty for a steady bull market. But, as Saut notes, there has been no fundamental change in the economy. As a result, the bull market can continue in 2019, though it is likely to be volatile.

Any opinions are those of Glen D. Smith and not necessarily those of RJFS or Raymond James. All opinions are as of this date and are subject to change without notice. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance may not be indicative of future results.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative ofthe U.S. stock market.

Raymond James Financial Services Inc., its affiliates, officers, directors or branch offices may in the normalcourse of business have a position in any securities mentioned in this report. This information is notintended as a solicitation or an offer to buy or sell any security referred to herein.

Keep in mind that individuals cannot invest directly in any index, and index performance does not includetransaction costs or other fees, which will affect actual investment performance. Individual investor's resultswill vary. Future investment performance cannot be guaranteed, investment yields will fluctuate withmarket conditions.

This is not a recommendation to purchase or sell the stocks of the companies mentioned.

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About the Author

Glen Smith, CFP®, CRPC®

Managing Partner, Glen D. Smith and Associates

Glen Smith has worked in the financial services industry since 2004. He has amassed comprehensive knowledge and holds himself to the highest standards of ethics and integrity. He works closely with people to craft individually tailored financial plans, ensuring every portfolio and financial plan reflects the client's best interests.

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