MONEY Millennials

How to Make Money Off Millennials in 2015

People doing "the wave" in a stadium
Doug Pensinger—Getty Images

In 2015, the oldest wave of millennials turns (gulp) 35—a milestone with significant implications for the job market, stocks, and the economy at large.

You hear a lot about the drag that the graying of the baby boomers could have on long-term economic growth. What’s often overlooked, though, is the fact that the U.S. will be golden on another demographic front: The biggest birth year in the bigger-than-boomer millennial generation turns 25 in 2015, while the oldest wave turns 35. These are significant milestones not only for those who get a slice of birthday cake but for the economy at large.

After all, 25 is when one’s career starts to get into full swing. While the unemployment rate for 20- to 24-year-olds is 11%, it’s 6% among 25- to 34-year-olds. For those with college degrees, the rate drops to 5%. Meanwhile, the mid-thirties are “when you hit higher-earning years, are more inclined to get married, and start putting money into the stock and real estate markets,” says Alejandra Grindal, senior international economist for Ned Davis Research. Plus, “productivity growth tends to peak when workers are 30 to 35,” says Rob Arnott, chairman of investment firm Research Affiliates.

Here’s how you can profit from millennial-driven growth.

Favor U.S. stocks. The stock market has tended to take off when the number of workers 35 to 49 has surged. Boomers aging into this bracket, for example, coincided with one of the longest bull markets, from 1982 to 1999.

As a metric, investment pros look at the M/Y ratio, which is “mature” workers (ages 35 to 49) divided by young ones (20 to 34). The U.S. M/Y ratio has been declining since 2000 but will begin rebounding in 2015 and is expected to climb through 2029. “Certainly this improves opportunities here relative to Europe and Japan,” where the ratio is in decline, says Arnott.

Research from Vanguard shows you get almost as much of the diversification benefit of keeping 40% of your stock portfolio overseas by having just 20% abroad. So in 2015, shift to the low end, especially since Europe and Japan may be headed for recession (again).

rescue

Profit off their nesting. Three-quarters of Gen Y-ers surveyed last year by the Demand Institute planned to move in the next five years, many out of their parents’ homes. Capitalize on this trend by buying home-related stocks. Gain exposure via SPDR S&P Homebuilders ETF, which counts Bed Bath & Beyond, Home Depot, and Williams-Sonoma among its top holdings besides homebuilders. The ETF’s stocks trade at about 10% less than consumer stocks in general, owing to the slower-than-hoped real estate rebound.

Shoot for the middle on college. With the bulk of millennials past their undergrad years, college enrollment has been falling since 2011. Many schools are discounting tuition to lure students. If your child is applying, “don’t get your heart set on universities in cities on the coasts,” says Lynn O’Shaughnessy, author of the College Solution blog. Schools in the middle of the country, less in demand, may offer better deals. Also consider smaller mid-tier colleges, adds Robert Massa, former head of admissions at Johns Hopkins.

Illinois Institute of Technology, DePauw University, and Rockhurst University are three Midwest schools on MONEY’s Best Colleges list that recently offered first-year students average grant aid of at least 50% of published tuition, according to government data.

Read next:
5 Ways to Prosper in 2015
Here’s Why 2015 Will Be a Good Year for Stocks
Here’s What to Expect from the Job Market in 2015

 

MONEY energy

3 Ways to Profit from Falling Oil Prices

Fortune Teller's ball with oil sloshing inside
Gregory Reid

Stagnant global demand and increased supply has pushed oil to its lowest price since 2009. Here's how savvy investors can take advantage.

Big jolts to energy prices are often caused by major economic imbalances—like rising tensions in the Middle East setting off supply scares. Or a dropoff in demand from a recession, causing prices to plummet.

This time there is no global crisis behind crude’s slide (from $105 a barrel in the summer to around $60 recently, its lowest level since 2009). Instead to blame: fresh worries about growth in Europe, Japan, and China, set against rising production in Saudi Arabia, Russia, Libya, and the U.S.

Don’t expect producers to turn off the spigot just yet, especially in the U.S., where the burgeoning fracking industry can still profit at lower prices. Analysts at Goldman Sachs predict output and use will both grow in 2015, but supply will outpace demand. That should push oil down further. Here’s how you can protect your portfolio and profit from the oil glut.

Your Action Plan

Ease off emerging markets. Russia and Iran need oil at or above $100 a barrel to avoid major budget deficits, says Matthew Berler, CEO of investment firm Osterweis. The Saudis have been playing hardball by refusing to cut production, and if they continue, “other parts of the emerging markets could get hit,” says Tom Forester, head of Forester Capital Management. Good reason to cut emerging markets to 5% of your portfolio.

Bet on shipping. With gas expected to stay 30¢ a gallon below 2014 highs, “the transportation industry is getting a big windfall,” says economist Edward Yardeni. Railroad stocks have been on a tear for years. So lean toward cheaper truckers and airlines, which benefit from sinking prices and rising spending. Two-thirds of SPDR S&P Transportation ETF is in those industries.

Save on a gas sipper. “When gas prices go down, you see an immediate impact on vehicle choice,” says John Krafcik, president of pricing site TrueCar. Automakers have already begun discounting super-fuel-­efficient cars—the Ford Focus Electric recently fell $6,000—and Krafcik expects to soon see “fantastic deals” on gas-engine midsize and compact sedans, which can get 30-plus mpg. Everyone else may be buying big—the SUV is back!—but a contrarian play may pay off in the long haul.

 

MONEY stocks

How to Pick the Winner in a Corporate Spinoff

two men on a bike pedaling in opposite directions
Taylor Callery

For reasons good and bad, companies are dividing in two. Keep your eye on the smaller stock.

If you’re a Hewlett-Packard share­holder, your head may be spinning. In October, CEO Meg Whitman announced HP would split off its PC and prin­ter division from its technology services business so each side would gain “independence, focus, financial resources, and flexibility.”

Sounds plausible. Except three years ago she argued against this move—which was recommended by her predecessor Léo Apoth­eker—claiming that it would lead to billions of dollars in wasted costs.

Ignore the Hype, Not the Stock

This kind of CEO flip-flop may turn you off. So might Wall Street’s perpetual cycle of mergers and acquisitions, split-ups, and then new mergers. This year, M&As and spinoffs are both surging.

That said, spinoffs like Hewlett-Packard’s are the one kind of deal with a good record. “While the data is overwhelming that the average acquisition destroys shareholder value, the average spinout tends to work well,” says Christopher Davis, chairman of Davis Advisors.

Focus on What’s Being Spun

Pat Dorsey, founder of Dorsey Asset Management, says, “There comes a point when mature companies take a hard look at themselves and say, ‘We need hair dye.’ ” Often, this means concentrating on the faster-growing division. In HP’s case, that’s the tech services business, which will be dubbed Hewlett-Packard Enterprise. Whitman will be its CEO.

The spun-off hardware division will be called HP Inc.  It offers less earnings growth—but might be the better buy. A 2004 Purdue study of breakups from 1965 to 2000 found that while parent companies don’t meaningfully outperform their peers on average, spinoffs do, especially in the first couple of years. A Bloomberg index of spun-off stocks has outpaced the S&P 500 by five percentage points annually over the past 10 years.

Why? Spun-off companies are usually smaller, and history says there’s a small-stock advantage. Also, if the spinoff is unloved by the parent, it’s likely to be overlooked by fund managers and analysts, especially in the early going, Dorsey says. This creates an opportunity for bargain hunters.

Of course, “not every spin works,” says Joe Cornell, founder of the advisory firm Spin-Off Advisors. (And full disclosure: MONEY is owned by Time Inc., which was split off this year by Time Warner.)

What about Hewlett-Packard Enterprise? Dorsey, for one, can’t imagine it will grow as fast as Whitman hopes. “Servers and consulting—that’s what IBM does,” he says. “Have they looked at how IBM has been doing lately?” That stock is down 14% this year.

 

MONEY stocks

What the Republican Majority Means for the Market

Senate at US Capitol
AA World Travel Library—Alamy

Will the Republican victory in the Senate lead to more legislation or gridlock? As far as Wall Street is concerned, that doesn't matter as the markets are about to enter their most fruitful months.

With most of the votes counted in the mid-term elections, Republicans picked up at least seven seats in the Senate last night, giving the GOP control of both houses of Congress for the first time in a decade.

The GOP’s majority in the Senate could still widen, depending on the count in Alaska and a December run-off in Louisiana, where neither Democratic incumbent Mary Landrieu nor Republican challenger Bill Cassidy won 50% of the popular vote in a three-person race.

Are the Republicans now in position to set a new economic agenda into motion? Or will the final two years of President Obama’s term be characterized by more of the gridlock that has largely stifled serious policy discussions in recent years?

As far as Wall Street is concerned, it doesn’t really matter. Here’s why.

1. We are about to enter the third year of the Obama administration. And third years are hands-down the best years in the stock market.

In fact, since 1926, the S&P 500 has gained nearly 17% on average in Year 3 of presidential terms, according to the investment research firm the Leuthold Group. The next-best years for stocks are presidential election years, when equities have gained 9.8% on average.

Jeffrey Hirsch, editor-in-chief of the Stock Trader’s Almanac, adds that the Dow Jones industrial average has not suffered a third-year loss since 1939.

What accounts for the sizzling performance? Part of it has to do with the fact that the third year of an administration also tends to see the best growth in gross domestic product. Market strategists surmise that the party in power in the White House has a vested interest in stimulating the economy—and the markets—as much as it can in the year before it faces re-election.

2. Stocks surge sharply in the immediate aftermath of midterm elections.

Researchers at Leuthold discovered that stocks have risen at an annualized rate of nearly 25% (including dividends) in the period that runs from the midterm elections in November to April of the following year.

Sam Stovall, U.S. equity strategist for S&P Capital IQ, notes that “we are entering the strongest six-month period for the markets in the entire four-year presidential cycle.”

He points out that this stretch coincides with two positive forces for stocks. The first is the presidential cycle. But just as important is the normal seasonal tailwind that equities enjoy from November to April, historically the best stretch for Wall Street in most years as investors emerge from the summer doldrums.

3. Washington gridlock doesn’t stall markets.

Stovall broke down election year performance even further. He went back to 1901 and examined how stocks performed in years where there’s been a split Congress—that is, the House is controlled by one party and the Senate by another, as was the case heading into this election.

He also looked at years in which a president of one party has to work with a unified Congress controlled by the opposition, which is what we’ll have starting in 2015.

In years where a president works with a split Congress, the S&P 500 has risen around 6% on average (not counting dividends), which is slightly below the long-term average of around 7% (again, not counting dividends). However, in years where a president must work with a unified Congress controlled by the opposition party, the average return for stocks is 6.2%.

It’s even better when a Democratic president must work with a Republican-led House and Republican-led Senate, like we’ll have next year. In those instances, the S&P 500 has risen 8.6% annually.

“Whether it’s gridlock or unlock,” notes Jack Ablin, chief investment officer for BMO Private Bank, “stock market history suggests the combination of a Republican-controlled Congress and a Democratic president is the most profitable politically.”

MONEY tech stocks

Twitter Becomes Latest Victim of October’s Mini Tech Wreck

Twitter logo on iPad
Chris Batson—Alamy

Twitter joins a long list of tech heavyweights including Amazon.com, Google, Netflix, and Yelp that failed to beat Wall Street estimates — and whose stock got clocked.

In case you haven’t noticed, this has been a miserable month for tech — especially for those companies that couldn’t find a way to beat Wall Street’s expectations.

Just ask Twitter. The social media darling did pretty much everything that analysts has asked. The company more than doubled its quarterly revenues, posting sales of $361 million. Twitter turned an actual profit, albeit a mere penny a share. But that was what Wall Street analysts had been expecting.

Meanwhile, the company reported that the number of active users grew 23%; timeline views (Twitter’s equivalent of website page views) increased 80%; and ad revenues from those page views increased 83%. Still, as UBS analyst Eric Sheridan told USA Today, the results lacked “upside surprise.”

The result: Investors pummeled the stock, which lost more than 10% of its value in after-hours trading Monday.

TWTR Price Chart

TWTR Price data by YCharts

Twitter wasn’t the only technology company to be taken out to the woodshed.

Last Thursday, Amazon.com did what it usually does — the e-commerce giant reported robust sales growth, but couldn’t manage to turn a profit amid its massive build out. Investors weren’t in a forgiving mood, shaving more than 8% off the stock’s price:

AMZN Price Chart

AMZN Price data by YCharts

The day before that, Yelp reported decent results, but the review site warned investors that fourth quarter sales would fall short of expectations. The result: Investors erased nearly a fifth of the value of the social media company:

YELP Chart

YELP data by YCharts

The week before that, Google reported strong profits, but said that the amount of money it is making per ad is falling. That was enough to knock the stock down.

GOOGL Chart

GOOGL data by YCharts

And the day before that, Netflix announced it attracted far fewer new U.S. members for its streaming video service than was previously estimated. That was enough to erase more than a fifth of the company’s market value:

NFLX Chart

NFLX data by YCharts

MONEY currencies

Making the Most of a Mighty Dollar

Man flexing arm with $ tattoo on it
Claire Benoist—Prop Styling by Brian Byrne for Set In Ice; Tattoo Design by Andy Perez

The buck is back. Here's how to make the most of a stronger currency—and avoid the costs.

After getting pushed around for much of the 2000s, the once-wimpy buck is fighting back. The dollar has gained nearly 20% over the past 3½ years, compared with an index of global currencies. It’s now at multiyear highs against the euro and yen.

This is good news because it represents a global vote of confidence in our economy. Investors worldwide snap up bucks when they want to buy things denominated in our currency—including U.S. bonds, stocks, and other assets. The dollar’s current rally got going in 2011 and 2012, as the U.S. economy fitfully grew while Europe and Japan slipped into double-dip recessions. That has made America look like a better relative investment, says Brian McMahon, chief investment officer at Thornburg Investment Management.

And as our recovery gains strength, interest rates should nudge higher, making bonds more attractive to yield-seeking overseas investors. So the dollar could keep bulking up from here.

Dollar rallies have historically corresponded to a strong stock market, but “in any shift in a currency, there are going to be winners and losers,” says Liz Ann Sonders, chief investment strategist for Charles Schwab. You probably have some of both in your portfolio. So here’s a rundown of how things are likely to play out, asset by asset:

U.S. STOCKS

Bet on the American consumer … In part, the dollar boom is a reflection of the same trends that are benefiting any stock that’s sensitive to an improving domestic economy. GDP grew at an impressive rate
of 4.6% in the second quarter.

Yet the dollar isn’t just a mirror of U.S. strength. Its rise will also help lift some parts of the -economy. “The big winner is the U.S. consumer,” says Mark Freeman, chief investment officer for Westwood Holdings Group. One reason: A rise in the dollar tends to correspond to a drop in oil and other commodity prices. Since April 2011, the price of a barrel of crude oil has fallen by around 25%. Lower costs for energy leave consumers with more money to spend on other things.

Transportation stocks, including rail, freight, and airlines, benefit both from lower fuel costs and from consumer demand—more buying means more stuff is being shipped. A simple way to get exposure to the biggest names in these groups is through an index fund like iShares Transportation Average ETF.

… But not on U.S manufacturers. You can make room for a transportation-oriented ETF by lightening up on your exposure to U.S.-based multinationals.

For years, when the U.S. economy was sluggish, it made sense to bet on firms, such as Procter & Gamble THE PROCTER & GAMBLE CO. PG 0.0543% , that sell a lot to fast-growing markets abroad.

ROOM TO RUN

But a strong dollar will make it harder for such companies to compete with foreign rivals outside the U.S.  This is why large exporters such as Ford FORD MOTOR CO. F 1.4855% and tobacco giant Philip Morris International PHILIP MORRIS INTERNATIONAL INC. PM -1.1545% have cut expectations for profits this year. Industrial companies were once expected to grow earnings 24% in the third quarter. Now the forecast is 8% growth, according to S&P Capital IQ.

Be careful with dividends. In recent years, with interest rates very low, investors have turned to high-dividend-paying stocks to boost their income. So those stocks have boomed. But the rising dollar is signaling a steady shift to higher rates, says Freeman of Westwood Holdings.

Here’s why: Although U.S. bond yields remain low, they are significantly higher than what investors are now getting in many overseas markets. (Ten-year German bonds pay 0.9%, vs. 2.4% for Treasuries.) And the recent momentum in the dollar suggests traders expect U.S. bond yields to stay attractive—a reasonable bet given that the Federal Reserve is signaling that it will start gradually raising rates in 2015.

Better bond yields will be bad news for some high-income stocks, since many investors will switch from stocks that are attractive mainly because of their dividend checks. Income investors should go beyond just grabbing the highest yields and shift to companies that can also increase their payout steadily.

Susan Kempler, a portfolio manager at TIAA-CREF, points to Apple APPLE INC. AAPL -0.7723% , which yields just 1.8% but sits on more than $160 billion in excess cash. Such companies can be found in T. Rowe Price Dividend Growth Fund, which has beaten nearly 80% of its peers over the past decade.

FOREIGN STOCKS

Don’t give up …International investing tends to grow in popularity when the dollar sinks. That’s because when the buck loses value, Americans can make money on international stocks simply on the currency exchange. When the dollar rises, on the other hand, that’s a drag on returns.

So Americans’ attraction to foreign investing is likely to cool, says Scott Clemons, chief investment strategist at Brown Brothers Harriman. Yet this is precisely why you shouldn’t turn your back on international equities now.

For one thing, valuations abroad, especially for European shares, are low. Doug Ramsey, chief investment officer for the Leuthold Group, notes that U.S. stocks have historically been cheap—as measured by price relative to past earnings—compared with global shares. Recently, though, U.S. stocks have jumped to a 20% premium. On valuations alone, he says, “foreign equities should produce total returns of about two percentage points annualized above the U.S. over a seven-to-10-year horizon.”

You can gain European exposure through a broad-based fund that invests globally (so you’re still diversified) but with big positions in Europe. An example is Oakmark International, which is on our MONEY 50 recommended list of funds. The fund keeps more than 75% of its assets in European equities.

… But tread lightly in the emerging markets. As the dollar strengthens, expect rockiness in emerging markets as global investors reassess their portfolios.

Once rates start to climb in the U.S., says Kate Warne, investment strategist for Edward Jones, investors will shift to a more conservative mode, since they won’t have to take as much risk to earn a return. Many are likely to pull money away from emerging-markets investments. Warne says her company recommends that investors keep only 5% of their total portfolio in emerging-markets equities.

BOOMING BUCK

BONDS

Don’t assume the worst …
One cause of the strong dollar—-expected rising rates—may have bond investors shivering. When rates rise, the value of older bonds in your fixed-income funds will fall, reducing your total return.

But take a breath. A gradual rise wouldn’t be a catastrophe if you hold conservative short- and intermediate-term bond funds. Meanwhile, a strong dollar also brings some good news for fixed-income investors. Inflation, a major enemy to bond investors, is held in check by the rising dollar, thanks to lower commodity prices.

… But hedge your foreign exposure. As with stocks, American investors have used foreign bonds as a way to profit from a weak dollar. Indeed, the currency effect added about two percentage points to foreign bond fund total returns since 1985, according to the Vanguard fund group. But a strengthening dollar going forward would mean the currency trade hurts, not helps.

You can still maintain foreign fixed-income exposure for diversification, but in a way that hedges your bets. A few funds lessen the impact of currency shifts by essentially buying dollars in the open market every time they buy
a foreign bond. One solid option is
Vanguard Total International Bond Index, which charges just 0.23% of assets a year. Sometimes you are better off playing just the investment and not the currency it’s wrapped in.

MONEY stocks

Could Another Sell-Off Be Lurking This Week?

Traders work on the floor of the New York Stock Exchange October 15, 2014.
Brendan McDermid—Reuters

Last week's tumultuous week in the stock market sets the stage for yet more nervousness and hand-wringing as a fresh set of earnings and economic data are due to be released.

When Wall Street opens for business on Monday morning, will bad news about the global economy be bad news for stocks?

That was the case for most of last week, when the equity market was hit with a frightening sell-off that reminded investors of the bad old days of the financial crisis.

^INDU Chart

^INDU data by YCharts

Or will bad news turn out to be good news for the market, as was the case on Friday, when the Dow Jones industrial average soared more than 260 points?

^INDU Chart

^INDU data by YCharts

Friday’s dramatic rebound in stock prices reflected two forces that are likely to move the market in the coming days.

Keep an Eye on the Fed

At the end of this month, the Federal Reserve is slated to end its stimulative bond-buying program known as quantitative easing.

Investors are naturally nervous about this development, as quantitive easing, or QE, has been credited for the strength and length of what is now a five-and-a-half-year-old bull market. As many market observers have noted, Wall Street is about to lose a major psychological crutch.

Remember that when the Fed ended its prior two rounds of quantitative easing — in 2010 and 2011 — stocks sold off fairly quickly:

After QE round 1, which ended March 31, 2010:
^SPX Chart

^SPX data by YCharts

After QE round 2, which ended on June 30, 2011:
^SPX Chart

^SPX data by YCharts

But late last week, when the market was in the throes of a selloff, St. Louis Fed president James Bullard said in a Bloomberg TV interview that “we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.”

In other words, a member of the Federal Open Market Committee that sets the nation’s interest rate policy is openly mulling whether the Fed should postpone ending QE in light of recent market volatility.

Bullard’s remarks on Thursday were enough to give the markets a lift in the last two days of the week. And if there are more signs of a major global economic slowdown, including a possible recession in Europe and Japan, then the Fed may have to think twice about how — and how soon — it ends its stimulus efforts.

This week, investors will want to see if more members of the FOMC sound similar conciliatory notes of extending QE. So far, no one else has. Boston Fed president Eric Rosengren, a major defender of QE, said on Friday that he does not expect the Fed to extend the program at this juncture.

What else should investors look for?

  • Wednesday’s inflation report from the Department of Labor. If the global economic slowdown is starting to impact the U.S., we will start to see it in the form of lower prices for U.S. consumers.
  • Thursday’s report on the index of leading economic indicators from the Conference Board. The LEI is forward-looking barometer of economic trends, so if the global slowdown is likely to affect the U.S. in the coming months, this index should offer clues.

Keep an Eye on Earnings

Last week’s bloody selloff was peppered by major earnings disappointments on Wall Street. For instance, there was Netflix, which reported that subscriber growth wasn’t as strong as expected and saw its stock lose more than a quarter of its value on Wednesday. Google also disappointed Wall Street on earnings and revenue growth, as well as on paid clicks on ad links.

The idea is that if Wall Street is about to lose its QE crutch, it will have to fall back on the fundamentals — so corporate profit reports will have to look good.

On Friday, a slew of companies led by General Electric and Honeywell announced better-than-expected results, which helped drive stocks higher at the end of the week.

Yet the mood on Wall Street regarding earnings is somewhat pessimistic. The strengthening U.S. dollar, brought about by the global economic slowdown, is expected to crimp global profits for U.S. exporters.

This week, several high-profile earnings announcements are due to be released. Here are the major ones to look for:

  • On Monday, Apple is due to report its results after the closing bell. Everything Apple reports is news these days.
  • On Tuesday, Coca-Cola will reports its results before the market opens. No company is as exposed to the global economy as Coke is.
  • On Wednesday, Boeing is set to reveal its earnings before the market opens. The global slowdown is expected to hurt U.S. exporters, and Boeing could be a sign of how bad things have become.
  • On Thursday, Amazon.com will report after the bell. Amazon isn’t just a bellwether of the tech economy, it is now a key gauge of the health of the U.S. consumer.
MONEY stocks

If This Is the Start of a Bear Market, Blame Alibaba

There's a possibility that the recent selloff morphs into a real downturn — and Alibaba's gaudy IPO may have marked the market's top.

It’s impossible to say if the recent plunge in the market is the start of a full-on downturn, or if it’s just a bout of short-term angst.

But if this does turn out to be an an official bear market, defined as a sustained drop of 20% or more, you can blame the Chinese e-commerce giant Alibaba and its celebrated initial public offering on Sept. 19.

That’s what famed bond fund manager Jeffrey Gundlach told CNBC earlier this week. Indeed, since Alibaba went public about a month ago, the broad market has lost almost all of its gains since the start of the year. And Alibaba itself has lost nearly 10% of its value.

BABA Chart

BABA data by YCharts

But it’s also what history says.

Bull markets are born at a time of fear, but as they mature, greed sets in. And at the top of the market, investors try to get their mitts on one last pot of gold.

That’s why many of history’s biggest downturns coincided with celebrated IPOs that exemplified the themes of the prior bull market.

You’ll recall, for instance, that in the summer of 2007, just as the financial crisis was getting going — and just months before the start of the 2007-2009 bear market — the private equity and financial services firm Blackstone Group went public … and proceeded to get hammered.

^SPX Chart

^SPX data by YCharts

And before that, in April 2000, AT&T Wireless went public just days after the market peaked on March 24, 2000.

In Alibaba’s case, the company exemplified the hot themes that had been driving the five-and-a-half-year-old bull market. That is, exposure to technology, mobile, social media, and China.

But all of that may prove to have been too much of a good thing.

MONEY stocks

Here’s the Deeply Depressing News About This Market

A trader watches the screen at his terminal on the floor of the New York Stock Exchange in New York October 15, 2014.
Lucas Jackson—Reuters

Sadly, there may be no safe havens this time. Stock investors typically turn to dividend payers and "low-volatility" stocks in rocky times. But those investments have gotten pricey.

When the stock market gets choppy, as it is now—the Dow Jones industrial average plunged by triple digits again on Wednesday — equity investors tend to set sail for calmer waters.

Historically, that’s led them to a few sheltered corners of the market.

First, there are high-yielding stocks, where payouts to shareholders serve as a cushion when stock prices crater. Dividend-paying stocks don’t prevent losses altogether—this is the stock market after all—but during the 2008 financial crisis, for instance, when the S&P 500 S&P 500 INDEX SPX 0.457% lost 37% of its value, the SPDR S&P 500 Dividend ETF SPDR SERIES TRUST DIVIDEND ETF SDY 0.3907% fell just 23%.

Investors also look for safety in so-called low-volatility stocks. These are shares of “steady Eddie” companies, often found in stable but slow-growing and boring businesses, that usually gain less than the broad market during upturns but lose less in downturns. Among the biggest holdings of the PowerShares S&P 500 Low Volatility ETF POWERSHARES ETF II S&P 500 LOW VOLATILITY PORT SPLV 0.2376% , for example, are Coca-Cola THE COCA COLA CO. KO -1.038% and Warren Buffett’s insurance and holding company Berkshire Hathaway .

History says that both dividend payers and low-volatility stocks not only provide ballast in turbulent times but actually outperform the broad market over the long run.

Normally, tilting your portfolio toward either of these types of stocks would make sense if you’re worried that the recent jump in volatility — as seen below in the CBOE VIX “fear” index — is a sign of worse things to come.

^VIX Chart

^VIX data by YCharts

Trouble is, nervous investors jumped the gun and bid up shares of dividend payers and “low-vol” investments before volatility actually manifested in the economy. Indeed, from 2009 to the start of this year, dividend investing proved to be one of the easiest ways to beat the market:

^SPX Chart

^SPX data by YCharts

In other words, these two conservative and time-tested ways to stay in stocks are now expensive on a relative basis. And recent history tells us that buying an overvalued stock is fraught with risk.

Take dividend payers. They typically sport lower price/earnings (P/E) ratios than the broad market because high-yielders tend not to grow that fast. (That’s why they return dividends to shareholders in the first place.) But these days the average P/E for stocks in the SPDR S&P 500 Dividend ETF is 18.3, based on projected future corporate earnings. By comparison, the average stock in the broad market trades at a P/E of 17.

Similarly, the average holding in the PowerShares S&P 500 Low Volatility ETF trades at a higher-than-average P/E ratio of 18.

The problem with these frothy prices is that they detract from the stability that these types of stocks normally provide. Feifei Li, head of research at Research Affiliates (a major proponent of low-volatility investing), published some thoughts last year about rising prices and valuations in the low vol space. Li noted:

Empirical evidence demonstrates that low volatility strategies offer higher-than-market returns and considerably lower risks… Not surprisingly, these desirable performance characteristics have attracted many players to the market … The fast pace of growth raises the question: Does the rapid flow into this space erode the strategy’s effectiveness in delivering attractive risk-adjusted returns? This is a legitimate concern.

Does this mean you should avoid low-vol stocks and dividend payers altogether? No, but it will take more work to find the handful of examples of these types of stocks that are undervalued and attractively priced.

Hey, no one said avoiding a downturn — while remaining in the stock market — would be easy.

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