Seeking shelter from the storm: the selloff continues

Stocks continued to plummet last week. The Dow Jones Industrial Average lost 2.19% to close the week at 15,988, while the S&P 500 Index declined 2.18% to 1,880, and the Nasdaq Composite Index fell 3.34% to 4,488. In fixed income, the yield on the benchmark 10-year U.S. Treasury fell from 2.11% to 2.03% as its price rose.
 
Markets are still struggling with falling earnings and deteriorating conditions in credit markets, although there was at least some stabilization in China's currency. But the losses were widespread — and brutal. U.S. small caps have now entered a bear market; biotech, a popular momentum trade, is down more than 30% from last summer's high; and stocks in China have suffered a mini bear market, down 20% in just two weeks. A rally in U.S. shares on Thursday offered some relief, but stocks were unable to hold onto their gains and suffered heavy losses on Friday.
 
Not surprisingly, investors are now wondering what to do next. Understandably, many are seeking the comfort of so-called "safe havens" like long-term Treasuries. When it comes to stocks, higher volatility will likely continue, which leads us to favor themes such as quality (i.e., companies with less volatile earnings and little debt), as well as strategies designed to minimize volatility.
 
For investors willing to maintain equity exposure, we would emphasize strategies such as minimum volatility, which, as the name implies, is explicitly designed to mitigate the impact of market gyrations. This approach is likely to prove more effective in an environment in which volatility is rising as a function of concerns over global growth, as opposed to other factors, such as rising rates. In addition, investors should look to stocks with high return-on-equity, low leverage and earnings consistency, often referred to as a quality theme. In a world in which conviction is plummeting, the market is likely to place a premium on consistency.

Part of a report by Russ Koesterich – Global Chief Investment Strategist, Blackrock