Christopher W. Marx

A reader of our recent blog post about stocks in rising-rate environments asked us for more details on the magnitude and timing of any stock-market sell-offs during those periods. They were uncommon but ugly, so we thought our answer warranted another post.

Stocks have generally performed very well in rising-rate environments. But the current rate cycle is unlike any other of the past 40 years, keeping investors on edge. A lot will depend on how inflation behaves.

As talk of an early Fed “tapering” triggered a sell-off in bonds, safe-haven equities have also suffered. Can low-volatility strategies survive rising rates and an unraveling of the safety trade, in which investors rushed headlong into safe assets no matter the cost? We say, yes—but you’ll need an active approach to navigate the near-term pitfalls.

After years of chasing safety at all costs, investors are now reaching for opportunities in long-spurned riskier stocks. But they will still want to safeguard their portfolios against painful market swings in the future.

Less volatile, defensive stocks have been so popular lately that many investors are now asking whether the low-volatility opportunity has come and gone. The question highlights why we think a multifaceted, actively managed approach is the way to go when investing in this space. These strategies have more levers to pull to avoid near-term risks and, thus, to extend the long-term return potential of low-volatility stocks.