Heightened volatility has once again shaken the stock market badly and pushed all major indices deep in red to start the final quarter of 2018. The CBOE Volatility Index (VIX), also known as the fear gauge, jumped to more than 28, its highest level since Feb 12, 2018. This suggests that market fears have started to set in. The fear-gauge tends to outperform when markets are falling or fear levels are high.
Soaring bond yields have dampened demand for riskier assets as it has sparked speculation about faster-than-expected rate hikes. Higher rates will likely erode corporate profits and slow down economic growth, making investors less willing to pay high prices for stocks. Additionally, the ongoing trade war between the United States and its major allies have added to the woes as it is the biggest threat to economic growth. The combination of other factors like ongoing troubles in emerging markets, Iran oil sanctions, another budget deadline and the mid-term election in November will continue to weigh on the stocks.
Nevertheless, the dual tailwinds of booming domestic growth and surging corporate profits will continue to keep the momentum in stocks alive. Historic tax cuts, higher government spending, and deregulation are spurring growth. Robust job gains, growing wages, record low unemployment, and an 18-year high consumer confidence will continue to drive the longest nine-year bull run.
In such a scenario, investors are looking for products that provide stability and safety in a rocky market. Nothing seems a better strategy than picking ETFs with a combination of value stocks and higher dividend yields in this kind of an environment.
Inside the Strategy
Value stocks have strong fundamentals — earnings, dividends, book value, and cash flow — that trade below their intrinsic value and are undervalued by the market. These seek to capitalize on inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with growth and blend counterparts. Additionally, value stocks are less susceptible to trending markets and their dividend payments offer safety in times of market turbulence.
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