High-Quality Stocks Hold Up Better In Broad Equity Market Corrections

If investors are concerned about a looming correction, one approach is to focus on high-quality stocks. S&P Dow Jones Indices constructs two indices - one comprised of high-quality stocks and the other of low-quality stocks. The high quality index contains 135 stocks made up of companies with Earnings and Dividend Quality Rankings of "A" or better. The low quality index contains 172 stocks whose Rankings are "B" and lower.

spikes in the volatility index (VIX), or the investor fear gauge, coincide with declines in the S&P 500 index. The VIX has continued to trend lower since the end of the financial crisis. A move higher in the VIX occurred near the end of 2011, as the market reacted negatively to the U.S. debt ceiling debate taking place in Washington. The second chart shows the ratio of the low quality index divided by the high quality index compared to the VIX index. Evident in this second chart is the fact that high-quality stocks outperform low-quality ones in periods where the VIX moves higher, i.e., during market declines.

Source: Seeking Alpha

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