More conservative stocks are becoming more attractive due to increased volatility and the increasing possibility of a downturn. Vanguard High Dividend Yield ETFNYSEARCA:VYM) contains over 400 of these companies and has performed well in recent turbulence.
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The investment environment has changed dramatically.
It began with a sell-off of small-caps.
Seven major ETFs track broad averages (Stockcharts).
Both micro-caps (top row second from right) as well as small-caps broke key trends at year’s beginning. Both had spent the better part 2021 consolidating gains from post-lockdown rallies.
These sell-offs can be best described as equity traders shifting from a risk-on policy stance to neutral in light of the Fed’s increasing and certain hawkish turn. This was due to high inflation.
FRED, Y/Y percentage change of core and overall CPI/PCE price indexes
The Fed is raising rates as a result. Three Fed Presidents now support 50 basis point increases at the upcoming meetings.
Jerome Powell, Federal Reserve Chair said that the central bank is willing to raise interest rates by half-point at its next meeting. This would allow for a more aggressive tone in curbing inflation than Powell used just a few short days ago.
Bullard was asked how fast the Fed should move and he replied, “faster is better,” adding, “The 1994 tightening cycle (or removal of accommodation cycle) is probably the best analogy.”
Fed President Mester
Fed President Mester on rate policies (Twitter).
Bond markets are now open Sharply discounted:
The Bloomberg Global Aggregate Indice, which is a benchmark for total corporate and government debt returns, has fallen 11% since January 2021. This is the largest decline since the peak of data in 1990. It also surpasses the 10.8% drawdown in 2008’s financial crisis. It means that the index market value has dropped by $2.6 trillion, more than $2 trillion in 2008.
This has resulted in a tightening effect on the treasury curvature:
FRED 10-2 Treasury Market Spread,
The above chart shows that a tightening of the treasury markets is a solid indicator of a possible recession.
To sum up:
- In response to Fed hawkishness, small-cap stocks started to sell off
- Rate-hiking pressure is exacerbated by rising inflation
- Some Fed presidents have argued for a 50 basis-point increase in inflation at their upcoming meetings
- This has resulted in a sell-off of the bond market, tightening the spread of the treasury markt.
- This has a good track record in predicting recessions.
Investors who want to remain exposed to the equity market should consider safer investments. Dividend payments are a good indicator of safety. These payments only occur if the company has enough funds to pay them regularly. These are well-established companies that are more likely than others to weather an economic downturn.
Vanguard High-Dividend Yield ETF This is a good investment option.
The FTSE High Dividend Yield Index is used to measure the investment return of common stocks in companies with high dividend yields.
The ETF holds 410 assets totaling $55.2 billion.
These are the 10 largest holdings.
VYM 10 largest holdings, Vanguard
Each of these 10 companies is one of the best and most reliable investments in their respective industry.
Unfortunately, the yield only stands at 2.75%. Despite this, the price has held relatively steady during recent market volatility.
Weekly and daily VYM charts. (Stockcharts).
The weekly chart (left), shows that prices have been consolidating sideways since the beginning of the year. The daily chart (prices), shows that the formation is a downward-sloping pennant, a continuation pattern.
Due to its composition, the VYM is still at higher risk of equity market exposure. Only investors who are more comfortable with risk should consider VYM. The ETFs’ bias towards larger, more stable, and more established companies makes it a worthy candidate to be included in a portfolio that must have equity positions.