Our stock market has become increasingly volatile. One day we’re up, the next we’re down. China’s stock market has been thrown into crisis, while Japan’s just climbed 7.7 percent. Couple that with all the conflicting opinions surrounding what the Federal Reserve is going to do about interest rates, and investors are starting to get—understandably—a little nervous. How are we to react to this growing frequency of volatility?
Investors big and small are faced with two obvious risks at the moment: a market-induced slowdown of the global economy and the prospect of an upcoming interest rate hike by the Fed. It makes sense why some would rather walk away entirely than face potential undesirable outcomes, but that’s not necessarily the best strategy. In times of instability and uncertainty, one thing can be for sure: there is also opportunity.
New areas of value are emerging, as well as assets that are surprisingly well-positioned for the our current market climate. Here’s a look at some market segments you might want to take another look at:
1. The European market.
European stocks are currently priced well, the eurozone economy is improving, and unemployment recently fell to the lowest it has been in three years. Plus, experts and media alike are speculating that there might be an extension of Europe’s current quantitative easing program. All of this makes the European market pretty attractive right now.
2. Large-cap stocks.
While the recent market downturn has hit some large-cap companies hard, it’s also created a great time to buy, with reasonable expectations for growth in the future. While we’re still in the middle of a market downturn, recent data suggests we could be looking at a decent close to the year.
3. High-yield stocks.
High-yield has actually stabilized over the past week, and history has shown that rising interest rates don’t affect these stocks as much as you might think. Plus, there has been a steady trend of investors buying market pullbacks.
4. Tax-exempt bonds.
Blame it on the market, but tax-exempt bonds are currently offering promising yields compared to taxable investments of the same maturity.
While there are places for opportunity in almost every situation, obviously you should observe a certain level of caution based on your particular risk tolerance. I can guarantee that there will be more bumps in the road due to the current instability in the global market, and it’s important to be cautious, yet strategic, when reacting.