Take a deep breath. After a whirlwind start to the year, you can be forgiven for feeling nervous about the state of the financial markets.
Yes, the Dow and the S&P 500 are back up after sharp declines earlier this year. But stocks are still on pace for their most volatile year since 2011. Sure, plunging prices at the pump are good for consumers, but they’ve taken a hammer to energy stocks. And interest rates around the world keep sinking. While falling yields boost the value of older bonds in your fixed-income funds, they sure make it hard to generate any income.
Rather than following the crowd that’s selling on today’s fears, take advantage of falling prices and do a little bargain hunting. Here are three places where that’s possible.
THE ROCKY STOCK MARKET
The worry: In 2013 and 2014, the S&P 500 experienced daily swings of 1% or more about once every six trading days. So far this year, it’s been one in three.
What the crowd is doing: Racing into low-volatility funds that focus on boring Steady Eddie companies like Procter & Gamble. As a result, the price/earnings ratio for stocks in the PowerShares S&P 500 Low Volatility ETF is 12% higher than the broad market. Yet “low vol” shares have historically traded at a 25% discount.
The smarter move: Look to an industry that’s not particularly thought of as a safe harbor in a storm: technology. Mature tech anyway. “On a relative basis, older, established tech firms look really attractive,” says BlackRock global investment strategist Heidi Richardson. Many tech giants, such as Apple APPLE INC.
, trade at P/E ratios of around 15 or less.
They also have a ton of cash, which lets them invest in research and development while still paying dividends. Moreover, the recent volatility in stocks has stemmed from fears that the Federal Reserve may start hiking rates this year. Well, tech has historically outpaced the S&P 500 in the six months following rate hikes. Lean into this group through iShares U.S. Technology ISHARES TRUST REG. SHS OF DJ US TECH.SEC.IDX
. Apple, Microsoft, and Intel make up more than a third of this ETF’s holdings.
THE ENERGY CRISIS
The worry: Oil prices may not be done falling. UBS, in fact, believes that the price of a barrel of crude may not return to recent highs for another 60 months.
What the crowd is doing: Ditching blue-chip energy stocks, including giants such as Conoco-Phillips and Halliburton, which have sunk 20% to 40% lately.
The smarter move: Play the odds. The Leuthold Group found that a simple strategy of buying the market’s cheapest sector—now energy, based on median P/E ratios—and holding on for a year has trounced the broad market. “Value surfaces without even needing a catalyst,” says Doug Ramsey, Leuthold’s chief investment officer.
You can gain broad exposure through Energy Select Sector SPDR ETF ENERGY SELECT SECTOR SPDR ETF
, which beat 99% of its peers over the past decade and charges fees of just 0.15% a year.
THE THREAT OF DEFLATION
The worry: Rates around the world will keep sinking, as conventional wisdom says deflation is a bigger threat than inflation.
What the crowd is doing: Pulling billions from products such as Treasury Inflation-Protected Securities that are meant to guard against rising prices—investments now yielding even less than regular bonds.
The smarter move: Embrace that lower-yielding debt, at least with a small part of your portfolio. Joe Davis, head of Vanguard’s investment strategy group, says inflation may not spike soon. But the time to buy inflation insurance is when no one is scared, and it’s cheap. Consumer prices would only have to rise more than 1.8% annually over the next decade for 10-year TIPS to outperform.
Conservative investors should look to short-term TIPS, which are less sensitive to rate hikes, says Davis. Vanguard Target Retirement 2015, for instance, allocates about 8% of its portfolio to the Vanguard Short-Term Inflation-Protected Fund
This won’t seem fruitful—until, that is, inflation finally rears up.