Stocks in these 4 sectors can help investors weather the historic surge in volatility, Bank of America says
"The highest quality stocks tend to outperform as the VIX rises while the lowest quality stocks tend to large the most," Bank of America said.
AP Photo/Koji Sasahara
- Stock market volatility surged to historic levels, with the VIX spiking as much as 172% on Monday.
- Bank of America strategist Savita Subramanian expects more volatility ahead.
- Subramanian said investors should buy defensive stocks so they can "sleep at night."
Volatility in the stock market made a historic surge on Monday, and it might not be over.
According to Bank of America strategist Savita Subramanian, investors should "get used to the volatility."
"Prior presidential election years have seen the VIX increase by about 25% from July-November in tandem with rising policy uncertainty," Subramanian explained.
The CBOE Volatility Index, more commonly referred to as the VIX, soared as much as 172% to the 65 level on Monday, representing its largest intra-day gain on record, even surpassing intra-day gains seen during the COVID-19 pandemic and the Great Recession in 2008.
To combat expectations of continued volatility, Subramanian said investors should buy defensive stocks that would allow them to "sleep at night."
"The best hedge is owning high quality stocks," Subramanian said of combating market volatility.
Most of these defensive stocks are found in defensive sectors, which include consumer staples, healthcare, real estate, and utilities.
They're considered defensive because even during periods of economic downturns, their products and services still see reliable demand.
To screen for these stocks, the strategist focused on companies that have stability in both their earnings and dividend payments.
"Market tranches based on quality have a well-behaved relationship with the VIX — the highest quality stocks tend to outperform as the VIX rises while the lowest quality stocks tend to large the most," Subramanian explained.
Subramanian created a screen for stocks to buy during the market volatility. The filtering includes S&P 500 stocks that have earnings and dividend stability, offer low beta, are less held by investment funds, and have "Buy" ratings by Bank of America analysts.
These are the four defensive sectors that tend to outperform during market downturns, according to Bank of America.
Consumer staples — Stocks in this sector include Procter & Gamble, Kroger, PepsiCo, and Walmart,
Utilities — Investors eyeing utilities should look at stocks including Consolidated Edison, Alliant Energy, and CMS Energy.
Healthcare — Defensive healthcare stocks include ResMed and Quest Diagnostics.
Real Estate — Stocks to consider in this sector include Essex Property Trust, and Digital Realty Trust.