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The VIX, also known as the “fear index,” measures expected volatility in the S&P 500. When the VIX is high, it signals investors are fearful of market turbulence. With recession concerns mounting, many experts predict a coming surge in the VIX.
Defensive stocks that hold up during volatility can help hedge your portfolio. This article explores 3 recession-resistant stocks to consider buying now before volatility spikes.
Table of Contents
- Understanding the VIX
- Signs Pointing to a VIX Spike
- 3 Defensive Stocks to Buy
- Altria Group
- Kinder Morgan
- Key Takeaways
After a multi-year bull run, 2022 has brought heightened market volatility. The S&P 500 entered bear market territory earlier this year and continues experiencing large swings.
In times like these, the CBOE Volatility Index (VIX) becomes a closely watched indicator. Also known as the “fear gauge,” the VIX measures expected volatility for the S&P 500 over the next 30 days.
Many experts anticipate the VIX spiking again soon amid rising recession odds, earnings uncertainty, and other factors stoking investor anxieties. While volatility creates risks, it can also generate opportunities.
Certain defensive stocks offering steady revenues and dividends tend to hold up better when volatility strikes. This article highlights 3 recession-resistant stocks poised to provide ballast against a potential VIX surge.
Understanding the VIX
The CBOE Volatility Index tracks real-time quotes on S&P 500 index options to gauge expected volatility over the coming month. Essentially, the VIX measures how much the market thinks the S&P 500 may swing up or down.
VIX levels above 20 signal elevated fear and typically coincide with market selloffs. Readings from 15–20 show caution, while readings below 15 reflect complacency. For context, the VIX averaged just 14.7 during 2021 when stocks powered higher. It hit pandemic-era highs over 80 in March 2020 as COVID roiled markets.
While the VIX doesn’t predict market direction, sustained climbs show rising anxiety. With the VIX hovering around 25 amid various headwinds, many strategists forecast additional volatility ahead.
Signs Pointing to a VIX Spike
Several warning signs suggest investors should prepare for an impending VIX surge:
Recession risk — With GDP declining for 2 straight quarters, recession odds are climbing. Economic contractions cause volatility.
Inflation/rate hikes — Persistent inflation has driven aggressive Fed rate hikes, sparking recession and valuation fears.
Earnings uncertainty — Corporations face margin pressures from inflation and slowing growth. Q3 earnings pose risks.
Geopolitical turmoil — Conflicts like Russia/Ukraine place strains on energy and food supplies impacting economies worldwide.
Weak technicals — S&P 500 breakdowns through key support levels paved the way for additional downside.
With these dynamics in play, the stage looks set for another VIX spike when the next catalyst emerges.
3 Defensive Stocks to Buy
While volatility brings risks, it also creates opportunities. Savvy investors can take advantage by accumulating shares of defensive stocks presenting upside potential plus downside protection if the VIX rallies. Here are 3 to consider:
Altria Group (NYSE: MO) holds leading positions in smokable products (cigarettes and cigars) and oral tobacco. The company’s brands, including Marlboro and Copenhagen, retain pricing power and loyal customer bases even during downturns.
In Q2 2022, Altria grew its dividend 4.3%, extending its streak to 53 consecutive annual increases. MO shares offer an impressive 9.1% dividend yield and trade at reasonable valuations of 9 times earnings. The stock rose 6% in 2022’s first half when the S&P 500 plunged 20%.
Kinder Morgan (NYSE: KMI) operates over 80,000 miles of natural gas pipelines along with oil pipelines, terminals, and storage facilities. These assets provide stable fee-based income. The company forecasts 2022 distributable cash flow (DCF) exceeding its initial budget despite economic concerns.
KMI recently hiked its dividend 2% and has ambitious expansion projects underway, like doubling capacity on a Texas natural gas pipeline. Kinder Morgan shares provide a 6.5% dividend yield. The stock trades at just 13 times DCF and has held up better than most this year.
Ventas (NYSE: VTR) invests in senior housing, life science, and medical office properties located primarily in the U.S. and Canada. Its diverse portfolio contains over 1,200 assets that generate predictable cash flows.
Ventas grew senior housing revenues 14% year-over-year in Q2 2022. The healthcare REIT recently issued $750 million in convertible bonds to fund new investments and pay down debt. VTR shares pay a 3.4% dividend yield and appear reasonably priced at 15 times funds from operations (FFO).
With recession odds rising, experts forecast the VIX spiking from current elevated levels as volatility persists.
Defensive stocks providing essential products and services with stable revenues can outperform during times of market turbulence.
Altria, Kinder Morgan, and Ventas offer attractive dividend yields and trade at reasonable valuations while showcasing resistance to economic weakness.
Adding shares of defensive names can help hedge portfolios against market swings driven by economic and geopolitical concerns.
What stocks are good to own when the VIX is high?
Defensive sectors like utilities, healthcare, consumer staples, and tobacco tend to hold up best when volatility spikes. Stocks with pricing power, strong balance sheets, and generous dividends also provide ballast.
How can I protect my investments from volatility?
Maintain proper portfolio diversification and avoid overexposure to more volatile sectors. Seek quality stocks with steady revenues, strong financials, and dividends. Consider allocating some portfolio assets to bonds. Have a long-term perspective.
Should I buy stocks when the VIX is high?
For long-term investors, periods of elevated volatility can present opportunities to accumulate shares of high-quality companies at discounted prices. Cost-average into defensive names rather than making one large purchase.
With recessionary fears mounting, experts predict volatility will continue rocking markets. However, the anticipated VIX spike also creates chances for investors to grab defensive stocks at opportune valuations. Altria Group, Kinder Morgan, and Ventas offer portfolio protection through their recession-resistant business models and generous dividends. Maintaining exposure to quality stocks allows long-term investors to navigate market turbulence and get positioned for the eventual recovery.