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.
And 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:
- 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%.
- Consumer Staples: The Consumer Staples Select Sect. SPDR (ETF)(NYSEARCA:XLP) describe 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.
- Defensive Stocks: Companies that supply machinery for defensive purposes generally rely on government spending to drive their performance. Companies such as Honeywell International Inc.(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