When you add an element of the unknown to the capital markets, it can make for a volatile affair, but that can be eased by adding more quality to a portfolio.
The default move might be to immediately switch to safe haven assets like bonds or stores of value like gold. However, a sharp market downturn caused by the Omicron variant doesn’t signal a panic exit out of equities and into these safe haven assets.
Instead, a shift towards quality names can help mute the volatility when the unknown descends upon the markets in the form of COVID-19. This, however, doesn’t mean that investors should necessarily take their feet off the risk pedal abruptly.
“We do not recommend de-risking into weakness,” said Chris Harvey, head of equity strategy for Wells Fargo. “There is much we do not know about the Omicron strain, so we stick to things we think we know.”
A move to the quality factor is ideal, given that the market is in the latter stages of its cycle. However, an even more ideal proposition would be to add quality when the markets are running hot again.
“It’s later in the cycle," Harvey said. “The market is either at mid-cycle’s end or late-cycle’s onset, a constructive time for quality factors. We recommend adding quality exposure on market strength, not weakness.”
When should investors start making this move to quality? It won’t happen immediately, as it will take some time for the market panic to ease.
“Panic doesn’t disappear overnight," Harvey added. “The sharp reaction suggests stress levels will take at least one to two weeks to decay.”
Ease Market Fears With Quality
When that time does come, investors don’t have to opt for names that signify quality via multiple stock positions. One way to simply the process is to add one exchange traded fund (ETF) like the Invesco S&P 500 Quality ETF (SPHQ ).
SPHQ seeks to track the investment results of the S&P 500 Quality Index. In selecting constituent securities for the underlying index, the index provider calculates the quality score of each security in the S&P 500 Index, then selects the 100 stocks with the highest quality score for inclusion in the underlying index.
While names like Apple and Microsoft were once tilted towards growth, they’ve become quality names as well, which comprise the majority of SPHQ’s holdings. These big tech names could once again power investors through the pandemic should the new variant bring back lockdown restrictions.
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