Advertisement
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.

Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

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.

Advertisement - Article continues below

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.

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.

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for paying estimated taxes, IRA or HSA contributions, and other deadlines, there's more to do by July 15 than just filing your feder…
July 14, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Tax Day 2020: When's the Last Day to File Taxes?
tax deadline

Tax Day 2020: When's the Last Day to File Taxes?

Thanks to the coronavirus pandemic, the 2020 tax deadline was pushed back to give taxpayers (and tax preparers) more time to file returns.
July 14, 2020

Recommended

91 Top Dividend Stocks From Around the World
stocks

91 Top Dividend Stocks From Around the World

These 91 Dividend Aristocrats, from the U.S., Canada and Europe, are among the world's top dividend stocks for payout longevity and safety.
July 13, 2020
3 Municipal Bond Funds for Rich, Tax-Friendly Yields
Investing for Income

3 Municipal Bond Funds for Rich, Tax-Friendly Yields

Municipal bond funds allow you to enjoy the benefits of tax-exempt income. By investing in CEFs, you can sweeten the pot even further.
July 13, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 10, 2020
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
July 9, 2020