Navigating Between Risk and Opportunity

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

With the market reacting of late to President Trump’s future and the discussion about that and the secondary effects it may have on his pro-business agenda, it is important to keep in mind the following:

  1. Market corrections happen a few times a year on average.
  2. There are strategies to address unwanted volatility.

It is too early to know where the independent investigation of the Trump campaign’s links to Russia will lead. But most years, something happens that causes the market to retrench. Below, you can see that the S&P 500 Index has averaged three 5% or greater corrections a year and one 10% or greater correction a year.

Frequency of Stock Market Corrections (1928-Present)

Sources: Ned Davis Research, S&P 500 Index. Monthly price returns from February 1928 to August 2015. *Denoted as a negative percentage value.

Investors who are concerned about managing volatility have options. Let’s start with diversification and thinking beyond traditional asset classes, like stocks and bonds, to include alternatives, such as risk arbitrage, which has a lower beta than the market at large.

Equity strategies that seek out cash-flow growth and efficient capital allocation contain desirable long-term attributes and strategies with a high active share may track a benchmark less closely than others, adding a degree of diversification within a relatively high-risk asset class.

Convertible securities provide some upside participation in rising equity markets, while offering some in down markets. In down equity markets, they take on more bond-like characteristics.

Shifting to high yield, one can consider a strategy that seeks to omit the riskiest and least liquid credits, or one can opt to shorten duration.

There are also flexible strategies that seek to navigate between risks and opportunities, as they emerge using fundamental analysis or momentum across a wide opportunity set. These strategies typically leverage a deep fundamental research effort or quantitative algorithms based on factors.

The information contained herein is general in nature and is provided solely for educational and informational purposes. New York Life does not provide legal, accounting or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting and tax advisors.

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

The S&P 500 Index is defined as an index of 500 stocks chosen for market size, liquidity and industry grouping and is designed to be a leading indicator of U.S. equities and reflect the risk/return characteristics of a large cap universe.

Active Share is a measure of the percentage of stock holdings in a manager’s portfolio that differ from the benchmark index. The researchers conclude that managers with high Active Share outperform their benchmark indexes and that Active Share significantly predicts fund performance.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio, in comparison to the market as a whole.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Multi Asset Solutions (MAS) team

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