5 Sectors that Can Weather Volatility in 2014

May 2, 2014
David Becker

During the past 20 years, volatility has increased from May to September, leaving investors wondering what stocks perform well during volatile periods. These 5 sectors are up to the task.

This article is published with permission from InvestmentU.com.

A well-known trading proverb warns investors to sell their stocks in May to avoid a seasonal decline in equity markets. This adage also refers to increasing stock volatility. During the past 20 years, volatility has increased from May to September, leaving investors wondering what stocks perform well during volatile periods.

Volatility has already been experienced in 2014. The S&P 500 has created a 9% high-to-low trading range, while increasing only 1% year-to-date. As bad as that sounds, there are a number of sectors that benefit from higher volatility. Investors who put their money in these sectors can be prepared when market conditions become difficult.

Five sectors that can weather volatility are:

1. Utilities

Utilities offer services to consumers such as electricity, gas, and water, and their stock prices usually outperform when the broader markets are volatile. Companies in these sectors provide services that are used daily, which can be reduced but not eliminated. For this reason, utilities are often unaffected by geopolitical events that often create volatility.

Wisconsin Energy Corp. (NYSE: WEC) is one of the best performing utilities, with a 52-week range of $39.04 to $48.48. The utility pays a robust 3.3% and boasts a hefty 20.2% profit margin. When the S&P 500 declined nearly 6% from mid-January to the beginning of February, WEC climbed 5%.

2. Consumer Staples

The Consumer Staples Select Sector SPDR ETF (NYSE: XLP) describes companies that make products that are used by individuals during all economic cycles. For example, toothpaste and toilet paper are used in the same quantities regardless of whether an economy is expanding or contracting. For these reasons, consumer staples tend to underperform growth stocks when an economy is booming, but usually outperform when markets are volatile.

3. Defensive Stocks

Companies that supply machinery for defensive purposes generally rely on government spending to drive their performance. Companies, such as Honeywell International (NYSE: HON), that provide aerospace products, security technologies, and specialty material for engine systems are stable in most market environments.

Honeywell is attractive, as it provides a 2% dividend yield and has a 14% profit margin. During the market swoon in late January, Honeywell was nearly unchanged.

4. Energy Stocks

Companies, such as EOG Resources (NYSE: EOG), that produce oil and natural gas usually perform well during periods of market volatility. Many times when geopolitical events generate downside market volatility, oil and gas prices climb in value. Higher oil and gas prices usually translate into higher returns for EOG, which makes this stock a good bet during unexpected market volatility. Earnings increased 23% quarter-over-quarter for this producer, while sales increased 24% during the same period.

5. Volatility ETFs

There are a couple of exchange-traded funds that increase in value when market volatility climbs. The most liquid of these securities is the iPath S&P 500 Short-term VIX Futures (NYSE: VXX). This security follows the performance of the “at the money” strike prices of the S&P 500 call and put options. The shares increase in value when volatility increases and decline when volatility declines.

As May approaches, investors should consider diversifying their portfolios with stocks that can weather the volatile period.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.