Monday brought a huge market downturn, with the Dow dropping a record 1,175 points. Tuesday morning didn’t look much better, with the market dropping an addition 567 points at the opening bell. Things calmed down as the day went on, with investors rallying to end the day up 567 points. With everything going on, I wanted to share my thoughts on the recent stock market volatility, what it means, and where defensive investors might look to shift their capital.
We don’t see the equity market volatility over the last several days as a signal of a larger economic contraction as much as it is a correction in the equity market. Typically, in the case of a greater recession, we’ll see credit spreads widen prior to seeing a drop in the stock market, which is not happening right now. Instead, this looks to be an equity correction combined with a flight to quality in other markets.
This volatility has been driven primarily by the movement of an overheated equities market back to fair values and private credit strategies are looking increasingly attractive. Accordingly, TIPS, Agency MBS, and US TSY should provide stability if the equity markets continue to fall. If inflation emerges as the ultimate market bogeyman, TIPS are preferred over the others on this list. For investors looking to stay in stocks and ride out an erratic market, low volatility ETFs become an attractive place to invest your portfolio, while equities with high recent price momentum become largely unappealing.
REITs have significant exposure to the equity markets, and they also tend to have exposure to interest rates. If investors expect deflation or a falling interest rate environment, REITs perform well as income-producing assets. In a recession, REITs may in fact be more defensive than stocks as their earnings, and thus much of their value, are tied to long-term leases that remain in place regardless of market volatility. For investors looking to be particularly defensive, residential apartment REITs become more attractive while office and industrial park REITs become less desirable.
And a shameless plug: AlphaFlow’s AOP product is a great hedge against volatile equity markets. Contact us to learn more.
About the author:
As CIO of AlphaFlow, Chris is dedicated to finding systematic alternative investment solutions for all investors. He is on a mission to deliver cost-effective and transparent solutions to real estate and other private market investors. Prior to AlphaFlow, Chris was Managing Director, Head of Index Solutions, at Axioma where he led the expansion of its multi-billion dollar AUM index business into ETFs and equity options. Before Axioma, Chris was at BlackRock as a founding member of the FactorBased Strategies Group and the lead investment strategist for its flagship style factor hedge fund. During his tenure, Chris helped build the company’s smart beta and factor-based investing platforms and contributed to the design of the company’s first systematic fixed income ETF and alternatives mutual fund.