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Three strategic recommendations to combat expected market volatility

SCOTT BARLOW

David Kostin, chief U.S. equity strategist at Goldman Sachs, provided an excellent roundup of 2022’s market carnage to date and offered a three-prong strategy for investors to follow for the remainder of the year in order to protect asset values.

Mr. Kostin offered this onesentence explanation for first half market action, the best I’ve read so far: “Higher-than-expected inflation readings translated into a faster-than-expected pace of Fed tightening, which prompted a backup in nominal 10-year Treasury yields … and a jump in real yields which compressed the S&P 500 P/E multiple by 24 per cent … and led to a 20-per-cent-plus decline in U.S. equities.”

In effect, the jump in bond yields made equities less attractive, causing a rerating lower of price-to-earnings ratios. The strategist noted that the entirety of S&P 500 declines has been valuation-driven rather than earnings-driven – consensus profit forecasts have actually climbed this year, rather than been cut. As an aside, Mr. Kostin’s counterpart at Morgan Stanley, Michael Wilson, believes downward earnings revisions are the next shoe to drop for equity markets.

Goldman Sachs has three strategic recommendations to combat expected market volatility for the second half of the year. The first is to focus on companies where the pace of earnings growth is the least volatile, rather than the highest rate. Mr. Kostin pointed to his Stable Growth basket of stocks which includes Alphabet Inc., Home Depot Inc., Colgate-Palmolive Co., Amgen Inc., Waste Management Inc., Automatic Data Processing Inc., Visa Inc., and American Tower Corp.

The strategist also recommended health care stocks. He noted that profit margins in the sector have historically been resilient during recessions – consumer staples is the only sector where margins held up better. Health care stocks have actually increased earnings during the past six recessions.

Mr. Kostin also recommends dividend stocks to combat volatility, particularly companies with high and growing payouts. The median stock in his High Dividend Growth basket has a yield double that of the S&P 500, dividend growth twice that of the index, and a lower P/E ratio than the benchmark’s average.

Stocks in the U.S. dividend growth basket that are most likely to interest Canadian investors include Ford Motor Co., Molson Coors Beverage, Merck & Co. Inc., Amgen Inc., United Parcel Service Inc., Corning Inc., Analog Devices Inc. and Packaging Corp. of America.

Goldman Sachs, along with Morgan Stanley, BofA Securities and others, is another example of a major Wall Street firm recommending that investors batten down the hatches and get defensive. Canadian investors have so far been spared a lot of volatility because of strength in energy stocks, but recent weakness in oil could be a signal that defensiveness is the right trend on this side of the border, too.

GLOBE INVESTOR

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2022-07-07T07:00:00.0000000Z

2022-07-07T07:00:00.0000000Z

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