As the Economy Slows, Favor Consistency Over Volatility

Key takeaways:

  • In many ways 2023 continues to be the mirror image of 2022, with the most volatile assets being some of the best performers for much of the year.
  • Growing evidence of an economy that is slowing warrants an allocation to low volatility equities with a focus on companies who are able to provide stable and consistent earnings.

Russ Koesterich, Managing Director, discusses why a moderation in economic growth may warrant an increased allocation to lower volatility stocks in portfolios.

In many ways 2023 continues to be the mirror image of 2022. One market dimension where this is most apparent: For much of the year, the most volatile assets have been some of the best performers. Last year the most volatile companies were sold as investors wrestled with a rapid rise in inflation and surging interest rates. In contrast, 2023 has witnessed a surprisingly rapid return to these same companies.

Through the July market peak, the volatility style factor, i.e. companies with more price volatility than their peers, outperformed. Since then, there has been a shift in investor preferences towards stability. As more evidence builds that the economy is slowing, investors are less willing to embrace volatility. Assuming further economic moderation in the coming quarters, investors should consider raising their weight to less volatile, more stable companies.

After underperforming their more volatile peers for most of the year, low volatility stocks and indices have been posting better relative performance since the start of August. While absolute returns have still been nominally negative, low volatility indices have outperformed by roughly 200 bps. The converse is also true. After ripping higher in January and then again in the spring, more volatile securities have come under pressure as the market has turned lower.