The markets are about to experience an increase in volatility, according to one portfolio manager.
Investors should brace for larger market fluctuations by choosing low volatility stocks rather than those of companies that are more market sensitive, said Chad Morganlander, portfolio manager at Stifel Nicolaus’ Washington Crossing Advisors.
“Low-volatility stocks tend to outperform high-volatility stocks,” he said. “In particular, they outperform high-volatility stocks when there's divergent monetary policy across the globe.”
Morganlander said the Federal Reserve’s expected rate hikes over the coming months would contrast with the European Central Bank’s ongoing easy money policy. He also anticipates a deceleration of global growth. Both factors could then lead to a stronger U.S. dollar in 2016.
Morganlander notes that the S&P 500 Low Volatility Index (^SP500LVOL) has outperformed the S&P 500 High Beta Index (^SP500HBETA) on a total return basis so far this year.
“You’ve gotten a better not only risk-adjusted return but also a tremendous amount of outperformance,” he said. “That's why low volatility stocks will be the best bet this coming year.”
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