How to Deal With Continued Volatility

Stocks struggled again last week. While equity markets were impacted by mixed economic data, the real catalysts were at the industry level.

Volkswagen’s emissions-cheating scandal weighed down auto makers, industrial companies came under pressure after bellwether Caterpillar lowered its revenue forecast and announced job cuts, and biotech stocks traded near bear market territory after a tweet from Hillary Clinton raised the specter of price controls in that sector.

In other words, in a change from the big-picture catalysts of the past few months, markets suffered thanks to stock-specific issues.

But regardless of the cause behind last week’s selloff, the losses reinforced how the investment climate has changed in recent months. Investors are still coming to grips with how to manage something we have not seen in a while: a regime of above-average market volatility. Looking forward, investors should expect the current high volatility regime to persist, as I write in my new weekly commentary, “A Call for Quality as Volatility Turns Up the Volume.”

Other Signs Pointing to Market Volatility

The combination of slower global growth, uncertainty as to the Federal Reserve (Fed)’s future path and less benign credit market conditions suggests continued heightened volatility.

In addition, Washington may also fuel volatility in the coming week. Congress needs to pass a continuing resolution by September 30th to keep the government funded and avoid yet another government shutdown. While I don’t expect a shutdown, the risk of that scenario increased somewhat Friday following the announcement that House Speaker John Boehner will resign from Congress at the end of October.

Tips for Navigating Market Bumps

So how to contend with the rocky road ahead? Rather than attempt to time each swing, investors may be better off managing the risks embedded in their portfolio.

While value stocks are at risk should economic growth estimates continue to come down, momentum companies are exposed to more spikes in volatility, a factor that has contributed to biotech’s recent underperformance. Conversely, so-called quality stocks, which generally have strong return on equity and low debt, may be better supported should volatility continue to remain elevated.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

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