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The S&P 500 finished September off nearly 5% – the first monthly loss for the benchmark domestic equity gauge since January.
With that, the index closed the third quarter with a modest 0.30% decline. A loss of 0.30% over 90 days isn't anything to be alarmed about. After all, September sits squarely in the worst six-month period for stocks and if we're going to boil things down even further, August through October is usually the worst three-month stretch for equities.
While those losses aren't dramatic, advisors know that they cannot sit idly by and hope for the best. With the arrival of the fourth quarter, it's an ideal time for advisors to reconnect with clients and discuss strategies that could be durable not only into year-end, but into 2022 and beyond.
A good place to start is with quality. It's a virtue that's frequently espoused in this space, but with valuations rich and economic forecast to slow next year, clients may be getting pensive and quality is an avenue for calming those jitters.
Quality Over Quantity
Don't just take my word for it. Consider what some experts are saying about quality stocks and how those names can benefit clients over the near-term and beyond.
“Over the past three months, stocks with more quality balance sheets and less volatile earnings patterns have outperformed the broader market by 2.8%. ranking in the top 88th percentile, historically,” says Matthew Bartolini, head of SPDR Americas Research. “In fact, momentum has been building for the quality factor over this period, and now leads all factors year-to-date in terms of returns.”
The rub is that quality isn't cheap, though it was several months ago. That's not something advisors need to obsess over because quality stocks are rarely inexpensive and recent performance trends in quality land suggest market participants are comfortable paying up for the benefits offered by this group of stocks.
In fact, advisors shouldn't obsess over quality's valuations. Rather, what they ought to focus attention on is how to access quality because it takes on many forms and that doesn't just mean individual stocks or funds.
“Targeting quality segments of the market can take different forms. You can target the factor outright or consider multi-factor exposures that have a quality bias,” notes Bartolini. “Strategies focused on dividend paying stocks with a track record of returning capital to shareholders are another option that can add an element of value, as dividend strategies tend to have a strong value bias and lower relative valuation metrics.”
Said another way, not all quality funds are dedicated dividend strategies, but many are likely to be chock of dividend-paying stocks because shareholder rewards are widely viewed as hallmarks of quality.
Speaking of Dividends...
Today's low interest rate, inflationary environment coupled with the resumption of payout growth following 2020 carnage due to the coronavirus pandemic is creating a perfect storm for dividend stocks, which is great news for advisors because this is an asset class clients are already familiar with.
As noted above, dividends are often signs of quality. More to the point, companies that steadily raise payouts and have the balance sheets to support that growth are quality companies.
“While focusing on dividend strategies or the quality factor may help you tamp down exposure to expensive tech stocks and increase the sustainability of balance sheets, focusing on small caps can assist on three fronts: valuations, market concentration, and potential reactions to policy responses in the next leg of the rally,” concludes Bartolini.
That's encouraging sentiment because it means advisors don't have to take undue risk to generate income and reduce volatility for clients.
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