Summer of Volatility | The Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Debt Deal Done

As I suggested in the last episode of Investors Edge, the debt ceiling was resolved without coming nearly as close to the abyss as many thought we might. And after a very modest amount of market volatility in the past week, stocks seem to be in full control of the upward trend that began last fall.

I also talked about the possibility of interest rates moving higher when the Treasury begins the process of refilling its coffers with its newfound borrowing power.

Much of the rise in stock prices this year has been a result of a valuation expansion as opposed to a rise in earning power. While the former could be predictive of the latter, it may also be false hope based on the idea that the Fed will no longer hike interest rates, allowing for more expensive equities all things equal.

And while the Fed may indeed stop raising short-term rates, there is a distinct possibility that longer-term rates could move substantially higher due to a surge in new Treasury bond issuance, less demand for Treasuries from foreign governments, and the significant longer-term fiscal challenges we still face.

Higher long-term interest rates could undermine the high-flying growth stocks that have powered the stock market so far this year, not to mention put further pressure on an economy that is already showing signs of a meaningful slowdown in economic activity.

Featured Insight: Unloved Dividend Stocks Worth a Look

With everyone out there chasing growth stocks and everything A.I., there may be an opportunity to take the road less traveled – boring stocks that pay dividends.

While the tech-filled NASDAQ stock index is up roughly 20% in the past 3 months, the Dividend Aristocrats, which include stocks that have increased their dividends for at least 25 consecutive years, are down around 3% over the same time frame.

Dividend-rich sectors like Utilities, Energy, and Consumer Staples are all down roughly 7% in the past month alone.

Let other investors succumb to the greed and fear of volatility, and take advantage of high quality companies that pay dividends while they’re on sale.

Looking Ahead: Summer of Volatility

Market volatility has subsided in recent weeks, but don’t expect it to stay that way.

While the market has become more comfortable with the geopolitical threats we face, they are still out there, and any number of different powder kegs could present a catalyst for market volatility.

The biggest challenge, however, is that a slowing economy is on a collision course with tighter monetary policy and reduced liquidity in the financial markets. Lower trading volumes during the summer months could exacerbate tighter liquidity conditions and cause larger swings in market prices for stock and bonds.

You can use volatility to your advantage with options, generating income while positioning yourself to buy on market pullbacks and/or sell on market rallies.

Just be sure not to panic and sell quality investments when they decline, and alternatively, don’t get too aggressive and chase the market by buying after big rallies.

Copyright 2024 The Business Journal, Youngstown, Ohio.