Choosing stocks in a volatile climate

A middle-aged couple looks at condiments in a grocery store.

Companies that produce and sell consumer staples are often “defensive” investments during an economic contraction.

Stock market volatility can make investment choices more challenging. However, over time the markets and the economy often demonstrate patterns that can help investors make more informed decisions. Knowing how markets and the economy performed in past cycles can help you position your portfolio to take maximum advantage of what happens now and beyond.

Taking cues from market history

One of the most important lessons that history teaches is that share prices start rising around six months before an economic recovery takes hold. This appears to be happening on course, as the markers have been climbing while the economy appears to be recovering.

Another important lesson is that certain market sectors do better as economic expectations brighten. These sectors often represent the best investment possibilities in times like these. Here are some sectors and industries to watch.

Multinational businesses. Companies that operate internationally may benefit from more rapid growth expected in emerging economies. This may be even more important for today’s economic cycle, as consumers in North America and other developed countries are showing a reluctance to spend.

Businesses that help consumers save. Consumers have turned from free-wheeling spenders into frugal shoppers. Businesses that specialize in low prices — discount retailers and fast-food providers, for example — may do well in this environment.

Consumer staples. No matter what the state of the economy, people have to buy the necessities of life. These include food and beverages, household products, clothing and pharmaceuticals.

Companies that produce and sell these consumer staples are often “defensive” investments during an economic contraction and can remain attractive in the early stages of a recovery. If the economic rebound proceeds more slowly than expected, the consumer staples sector may benefit.

Sectors tied to an improving economy. Sectors such as information technology, capital goods and transportation typically improve as the economic picture brightens. Also, financial stocks often perform well in the early stages of recovery.

Cash-rich companies. Individual company fundamentals are always important, regardless of the industry the company operates in. For example, companies with low debt and plenty of cash in their coffers are particularly attractive to investors today, when many consumers, businesses and governments are faced with high debt loads.

Companies with healthy cash flow can survive if the economic recovery stalls, and they also have the cash to reinvest in their businesses or expand through acquisition.

What’s different today

However, it’s important for investors to keep in mind that no two economic cycles or stock market advances are identical. In fact, the current environment may be notable for some of its differences. One is the fact that governments have spent huge amounts of money to get the economy back on track. This ramped-up government spending offers opportunities to invest in companies that will benefit.

Another factor is the slow nature of this recovery, which could lead to further economic and equity market volatility. In this climate, investors might consider averaging equity purchases over time to take advantage of price dips that can potentially lower the average cost of investing.

A Dividend Reinvestment Plan (DRIP) can help with this objective by allowing you to purchase additional shares or mutual fund units automatically from cash dividends paid on these securities. Plus, you’ll avoid commission costs on these transactions.

Do your homework

Finding companies that meet your investment criteria in a volatile climate requires good research. WebBroker has the tools you need to find and make the right investments.

Click on Markets & Research on the top navigation bar of the WebBroker home page to access a wealth of sector and company information. You can research and evaluate Canadian and U.S. sectors and industries. You’ll find information on individual companies within sectors — including financial details, news, stock performance and reports on sectors and individual companies.