U.S. markets made a big comeback in January after a tumultuous 2022. While the broader market index S&P 500 notched its first January increase since 2019, the tech-heavy Nasdaq logged its best January performance since 2001. Wall Street cheered declining inflation, robust labour market and a stronger-than-expected fourth-quarter U.S. GDP data. Therefore, investors have become increasingly hopeful of a soft landing as the Fed nears the end of its aggressive rate hike cycle.

U.S. Stock Market Performance in January 2023

Source: MSN Money, Data as of last close on 31st Jan 2023

While there are valid reasons behind investor optimism, analysts also see some signs of a global macroeconomic slowdown. Nevertheless, most economists see the impact to be mild and short-lived in the United States, if at all the economy were to take a downturn this year.

Building an all-weather portfolio

In volatile times, adding an immunity shield to one’s portfolio is never a bad idea. Here are some of the investment ideas that have historically fared better than the rest during an economic slowdown:

Dividend stocks

Besides providing stable cash flow, dividend stocks can be relatively, if not absolutely, a safe haven for investors amid market uncertainties. In the past twelve months, the S&P 500 High Dividend Index – comprising of the 80 highest-yielding stocks in the S&P 500 – and the S&P 500 Dividend Aristocrats fell about 1% only, in comparison to the benchmark index S&P 500 that lost around 9% during the same period. Some of the ETFs that invest in a basket of dividend-paying stocks are*:

• Amplify CWP Enhanced Dividend (DIVO)

• High Dividend Yield ETF Vanguard (VYM)

• US Dividend Equity ETF Schwab (SCHD)

Fixed income ETFs

Since fixed income assets are less volatile than equities, they are often used as a protection in uncertain times. Moreover, short term bonds have become more attractive due to high interest rates. Fixed income ETFs or bond ETFs track bond markets and offer the benefits of periodic income, liquidity and diversification to investors. Some of the short duration bond ETFs are*:

• Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH)

• VictoryShares USAA Core Short-Term Bond ETF (USTB)

• iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD)

Defensive stocks

There are some sectors in the economy like consumer staples, healthcare and utilities that withstand the recessionary phase better than the rest. Since the demand for consumer essentials and healthcare remains stable, they are considered defensive against economic slowdown. On the other hand, cyclical sectors like consumer discretionary and industrials are hard hit but tend to pick up as the economy recovers. Hence, buying cyclical stocks at a discounted price during the downturn can help make gains when the economy rebounds. Some of the defensive ETFs are*:

• IShares U.S. Healthcare Providers ETF (IHF)

• Consumer Staples Select Sector SPDR (XLP)

• Utilities Select Sector SPDR (XLU)

Conclusion

Diversification and asset allocation are integral to a healthy investment process which works towards portfolio stability and returns. Studies conducted over the years show that asset allocation can be a significantly more important attribute of portfolio performance over time than, say, individual investment selection or market timing. Instead of bailing on one’s investments during volatile times, creating a well-diversified portfolio consisting of all-weather assets can help investors sail through the vagaries of stock market.

*This content is merely for illustrative purposes and does not constitute investment advice or a recommendation to buy or sell securities of any kind.