Measured by options trading, volatility in the US stock market remains low relative to the past decade.
However, worries about the Federal Reserve’s next move on interest rates have made dividend-paying stocks characteristically volatile.
And whenever the talking heads spout off about inevitable rate increases, weaker hands abandon positions in best-in-class names on the mistaken premise that these stocks act like fixed-income securities that don’t include a growth component.
But over the longer term, dividend-paying stocks exhibit a greater correlation to the broader equity market and almost no relationship to changes in the benchmark interest rate.
An uptick in interest rates affects the price at which corporations can borrow money, which can influence earnings—if returns on investment don’t improve.
In this environment, investors should keep close tabs on their holdings’ quarterly results and management teams’ commentary to make sure that the underlying businesses remain healthy and continue to grow. Focusing on your holdings instead of the Federal Reserve will help you to spot potential danger and manage risks more effectively.
With falling energy prices, volatile exchange rates and China’s slowing economy ratcheting up the uncertainty, second-quarter earnings season will provide critical insights into how our holdings have held up in this challenging environment and what the future may bring.
As we listen to conference calls and pore over press releases and 10-K filings, we’ll pay particularly close attention to the following considerations: