Things haven’t been so rosy for the stock market lately. Various geo-political events as well recent poor data on a number of fronts has caused investors to start getting nervous in a big way. Many of the stock market indexes have begun to slump, while iPath S&P 500 VIX ST Futures ETN (NYSE:VXX) –which measures the markets “fear” -has suddenly ticked upwards to new weekly highs.
All in all, analysts are now predicting that a bear market could be ahead for stocks.
And given the dour predictions, investors may want to prepare themselves now. Luckily, there are plenty of inexpensive ways the average Joe can add a little defense and insurance to their portfolio. The time for a hedge may be on.
Trouble Brewing Ahead
It’s been an impressive five years for stocks since the end of the Great Recession. After hitting a low of 666 back in March of 2009, the SPDR S&P 500 (NYSE:SPY) has surged 172%. Those kind of gains are enough to cause any investor to pause and consider taking some money off the table. Even more so, when you take into account that things are starting to look a bit dour for the global economy. A host of issues could bring the beast back down to earth over the next few months and perhaps even years.
First, the situation in the various emerging markets is beginning to look very similar to 2011. Increasing deficits in nations like Turkey and Argentina have caused investors to flee these economies. That’s weakened their currencies and forced their central banks to raise rates. All in all, that will cripple and slow economic growth. Meanwhile, economic growth in key BRIC nation China has already begun to slow- with its PMI and manufacturing readings dropping fast. Likewise, the nation’s imports of industrial metal copper have plunged.
Similar issues in the emerging world back in 2011 caused a nearly 20% drop in the S&P 500.
Those emerging market issues are also effecting the economy here in the United States. That weakness has already begun to dent earnings reports from a variety of U.S. multinationals. Tech bellwether Oracle (Nasdaq:ORCL) was the latest to sight sales abroad for its profit miss. The situation is similar for a variety of European multinationals as well. Earnings growth has been pretty weak and measures of economic activity have been dropping.
Then there’s the Federal Reserve to consider. Janet Yellen and crew have continued to pare down their massive bond buying programs in recent months. That liquidity injection could be one of the reasons why the market is high as it is. Ending the cheap source of money may not be the best thing for higher stock prices.
Strategies for Insurance
Given these issues, it may be time for investors to think about adding a little caution to their portfolios. The exchange traded fund boom has provided regular retail investors some pretty sophisticated tools to help fight downturns. Broad “defensive” funds like the iShares MSCI USA Minimum Volatility (Nasdaq:USMV) are just some of the ways investors can prepare. Yet, there’s plenty more.
A potential straight hedge against market declines could be to simply add a short position to a portfolio. The actively managed AdvisorShares Ranger Equity Bear ETF (Nasdaq:HDGE) could be a great place to start. The fund uses a variety of screens to identify stocks with low earnings quality or aggressive accounting that are ripe for a fall. As the market has risen, HDGE hasn’t fared so well. But, if the bear does come, the ETFs holdings- like telecom CenturyLink (NYSE:CTL) –should plunge. For investors looking to go the index route when it comes to shorting- the ProShares Short S&P 500 (NYSE:SH) and the ProShares Short Dow 30 (NYSE:DOG) are ways to short the major markets.
Dividends remain one of most ideal ways to help cushion downturns and get through sideways moving markets. Making a few percentage points in yield can mean the difference between a loss and gain. An ideal way to add a dose of dividends is through the Vanguard Dividend Appreciation Index ETF (NYSE:VIG). The ETF tracks 146 different stocks that have a history of increasing dividends for at least ten consecutive years.
Finally, there’s nothing wrong with taking some money off the table and moving into cash. Parking it while waiting for more bargains is a good strategy in any market. And considering that interest rates could rise any day now, this cash could be worth even more tomorrow. The PIMCO Enhanced Short Maturity ETF (ARCA:MINT) and iShares Short Maturity Bond (BATS:NEAR) are basically money-market proxies with slightly higher yields. That makes them ideal parking places for investors' cash.
The Bottom Line
After a torrid run, the stock market may finally be seeing some cracks. Recent data as well various global political events have taken much of the bull’s energy away. That means it’s time for investors to consider adding a hedge and get defensive. The previous ideas- along with the Guggenheim Defensive Equity (NYSE:DEF) –are just some of the ways investors can prepare for the bear.