Last week’s surprise “no taper” decision by the Fed was bullish for both stocks and bonds, as the major averages vaulted after the Wednesday FOMC decision. Bond prices also rose, and bond yields pulled back significantly on the news. Then just a couple of days later, stocks tanked on the pending uncertainty of what is to come out of the infighting in Washington, D.C. over the debt ceiling and the funding of the federal government. Basically, the Fed has now relinquished center stage to the politicians in Washington, and that usually means the return of a high degree of uncertainty in the markets.
For traders, this uncertainty can be taken advantage of by buying sectors that tend to perform well during just such periods. Here I am referring to defensive and dividend-oriented stocks in the consumer staples sector, and one of the best ways to get long this sector is via the Vanguard Consumer Staples ETF (VDC).
Click to Enlarge VDC is a fund that gives investors exposure to some of the biggest companies in the defensive consumer staples sector. Stalwart stocks such as Proctor & Gamble (PG), Coca-Cola (KO), Philip Morris International (PM), Wal-mart (WMT) and PepsiCo (PEP) comprise the top five VDC holdings (in that order). These are stocks that tend to see capital inflows during periods of acute uncertainty. Moreover, with interest rates (bond yields) falling as a result of the recent Fed decision, dividend-paying stocks such as these also tend to do better.
I expect the uncertainty factor generated over the debt ceiling debate to keep a lid on the riskiest of stocks over the next several weeks, and that very well could mean a flight to safety in stalwart stocks such as those held in VDC. As such, a rotation of some trading capital into this ETF could be a good way to take advantage of the uncertainty while also playing a bit of defense.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.