Market corrections occur when the broad market (S&P 500, Nasdaq and the Dow Jones Industrial) declines at least 10%. In a correction, many stocks will decline even more than that, especially stocks that were overvalued or extremely popular prior to the correction.
But not everything goes down during corrections! Some safe-haven investments become more popular during corrections, and their prices rise as investors move money from riskier places to safer places. These safe investments range from the nearly loss-proof, such as short-term treasury bills, to the countercyclical, such as consumer staples stocks.
But let’s get a bit more specific…
Fixed-income investments are the classic safe haven, and the bond market often moves opposite the stock market. However, many individual investors—those investing through retirement plans, for example—will already have a fixed income allocation in their portfolio. Where can you turn when the market gets rocky other than fixed income?
Luckily, many institutional investors can’t (or won’t want to) move all their funds to cash or fixed income either. Actively managed equity funds, for example, may want to reduce risk, but they’re limited by their mandate to primarily invest in equities. Their only option is to shift their money to safer stocks. Many institutional investors are in similar situations, and these inflows can make the safest stocks go up when most other stocks are going down!
These types of stocks can come from almost anywhere, but they tend to have a few common traits.
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