Adam Spatacco, The Motley Fool
5 min read
It’s not uncommon for stocks to react with sharp unease whenever the Federal Reserve signals or executes on a new policy adjustment. The current macroeconomic environment features elevated inflation as well as new leadership at the central bank. These are conditions that can unsettle investors.
Luckily, history offers some guidance for navigating this turbulence. The one type of investment that has consistently held up during periods of uncertainty or outsized volatility is low-beta stocks. These are stocks whose price movements register a beta coefficient below 1.0 relative to the broader market. This financial jargon simply means these stocks tend to fluctuate in value less sharply than the market as a whole.
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Let’s explore how low-beta stocks have consistently displayed greater stability during periods when monetary policy decisions have rattled the broader market.
Analyzing historical patterns during Fed-driven market stress
History illustrates the resilience of low-beta stocks with striking consistency. Consider what happened during the series of federal funds rate hikes that occurred throughout 2022. These aggressive tightening protocols were implemented to combat inflation; however, they also naturally fueled successive waves of anxiety for some investors.
During 2022, the S&P 500 (SNPINDEX: ^GSPC) experienced a drawdown of roughly 25% at peak stress points between early January and mid-October. By contrast, a select basket of lower-risk stocks declined by only about 4% for the full year.
Similar dynamics played out in late 2018. Successive interest rate hikes fueled a rapid sell-off in the final months of the year, with the S&P 500 falling nearly 14% in the fourth quarter alone. While the broader index shed significant value, low-beta names exhibited limited losses. For instance, the S&P 500 Low Volatility Index fell by around 6% while the S&P 500 Low Volatility High Dividend Index declined by about 8% during the same time frame.
These patterns seem to recur because low-beta stocks often exhibit more insulated responses to rising interest rates or fears about the economy. In turn, this allows them to absorb policy shocks with less severity.
Why are low-beta stocks reliable?
Several attributes tend to support the durability of low-beta companies. Broadly speaking, their earnings power tends to be steadier because it is less tied to discretionary spending or capital-intensive expansion plans. Against this backdrop, shifts in borrowing costs or economic outlooks inherently have less of an effect on their business models.
