riding out the stock market storm

Riding out the stock market storm
Whether you expect the market to bounce or go bust, there are strategies for playing the pullback.
By Grace Wong, CNNMoney.com staff writer
June 19, 2006: 11:13 AM EDT


NEW YORK (CNNMoney.com) – Volatility has been the name of the game for stocks of late but that doesn't mean investors should flee the market.

Since mid-May, stocks have zigged, then zagged as investors have worried about inflation, slowing economic growth and the stewardship of new Federal Reserve Chairman Ben Bernanke.






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Stocks rallied late last week as the fog over the short-term interest rate outlook cleared, but the Fed could easily trigger more wild swings in the market if it offers no clues about what investors can expect in the coming months when the central bank's policy-makers meet next week.

The last time the Fed's policy-makers offered no clear answer about the rate outlook - when they met May 10 - the uncertainty sent stocks into a tailspin and triggered spikes in the Chicago Board Options Exchange's Volatility Index (Charts), a measure of the expected volatility of the S&P 500 index. (See graph)

Despite the market's choppiness, there are plenty of opportunities for investors, analysts said, with most saying the chances of "stagflation," the combination of rising inflation and slowing growth last seen in the 1970s, were small.

"We are not in a stagnant economy with hyperinflation. We're in a strong economy with an uptick in the underlying rate of inflation," said Joseph Battipaglia, chief investment officer for Ryan, Beck & Co.

Turning defensive
Nervous investors anticipating more challenging days ahead may want to turn to traditionally defensive picks, according to Sam Stovall, Standard & Poor's chief investment strategist.

Sectors like health care and utilities have performed the best in the most recent downturn. (See chart)

Investors may also want to think big, as large-cap firms often are better positioned to handle wide market swings than small stocks, analysts said.

The S&P 500 (Charts) has shed 5.6 percent over the last six weeks, but the Russell 2000 index of small-cap companies has tumbled 11.2 percent over the same period.

"Bigger companies are much more attractively valued to withstand a downturn. These stocks tend to have less volatility," said Battipaglia.

Large companies with a global presence can also be a safer way to tap international growth opportunities in times of volatility.

Industrial conglomerates like General Electric (Charts) are sensitive to global growth, according to Tom McIntyre, president and chief portfolio manager at Massachusetts money manager McIntyre, Freedman & Flynn.

Even if U.S. economic growth slows - as many economists expect - these firms benefit as other parts of the world keep growing. Large multinationals also tend to withstand risks like local currency swings better than companies based in those economies.

Bargain hunting
The current downturn also give investors a chance to snap up high-quality firms in sectors that have been pummeled but that are poised to rebound strongly. (See chart)

"We think this is a correction and not the beginning of a bear market," Stovall said about the market slump, noting that earnings are expected to remain strong while stock prices, especially in some sectors, are starting to look attractive.

And if the historical performance of major bull markets is any sign, he said, the S&P 500 could recoup most of its recent losses within two months.

Stovall said S&P analysts are upbeat on companies like oil refiner Valero (Charts) and construction materials firm Vulcan Materials (Charts), both of which belong to sectors that have been battered in recent weeks.

McIntyre thinks the run up in commodities is pretty much exhausted, but he thinks several good buys exist in the tech sector.

His picks include chipmaker Texas Instruments (Charts) and Juniper Networks (Charts), the maker of computer network equipment. Both firms are involved in technologies that help businesses cut costs and improve productivity, he said.

"A lot of these valuations are compelling. Somewhere out there, when the mood changes, demand for those shares" will return, McIntyre said.

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