Why Is There a Flight to Quality Investments?

WHY IS THERE A FLIGHT TO QUALITY
INVESTMENTS?
By www.ProfitableInvestingTips.com

http://profitableinvestingtips.com/investing-tips/why-is-there-a-flight-to-quality-investments
The US stock market is down a bit as
investors are flocking to quality
stocks, as reported by CNBC.

What is going on? Why is there a
flight to quality investments?

Both before the market’s October
sell-off and in the two-week bounce,
investors have shown a clear
preference for “quality” stocks.

Not the same as cheap “value”
stocks, these are companies with
less debt, stable businesses and
some defensive characteristics in a
tougher market or economy.

A grouping of such companies by Citi
surfaced the likes of Walmart,
McDonald’s, Pfizer, Procter &
Gamble, Amgen and Quest
Diagnostics.

While not predictive in itself, this
pattern is one seen in the run-up to a
bear market.

So, what is a quality
stock? CNBC notes this.

Quality has no single, strict definition.

But the common traits are a sturdy
business not reliant on a strong
economy; high and resilient
profitability; and a strong balance
sheet unburdened by much debt.

The point is that many investors are
hedging their investment risk as the
bull market gets older and older

the trade war does not appear to be
going away, and a House of
Representatives controlled by
Democrats may be a thorn in the side
of the Trump administration.

Does a Quality Investment
Need to Be a Stock?

An investment that is highly likely or
even guaranteed to make a profit and
is very unlikely to or guaranteed not
to produce a loss should be
considered a quality investment.

When the risk of an economic
downturn or market collapse rears its
ugly head, you might just want
to choose an investment that will
not lose money no matter what
happens.

In our article we noted that bank
deposits are protected by Federal
Deposit Insurance.

US Treasuries are protected by the
credit of the US government.

High grade corporate bonds are quite
safe.

And, long term investing in value
(quality) stocks is a way to preserve
capital during a downturn and a
experience gains as the economy
and market improve.

Why Is This Happening
Now?

Every investment niche has a cycle.
Gold, real estate, agricultural
commodities, stocks and any others,
all go up and then come down.

A steadily growing economy, low
interest rates, vibrant global trade,
and stability in the social and political
arenas lead to higher values in all of
these investment niches.

But, it would appear that many
investors think that the cycle is
running its course.

As an example, the S&P 500 is up
only 4% this year despite the Trump
tax cuts, repatriation of billions in
offshore cash, a twenty percent
increase in earnings, and about a
trillion in stock buybacks.

What happens in the coming months
when the Fed continues to raise
rates and a trade war with China
starts to damage US agriculture?

Folks may not be leaving the stock
market, but a lot of them are
repositioning themselves with
expectations of a different looking
investment scene in the coming
months and perhaps years.

Is This an Investment Sea
Change or a Just a Bump in
the Road?

If you are a passive investor and
only put your money in index funds,
you need only pay attention to the
general health of the economy and
the sector in which you are invested.

But, if you are heavily invested in
individual stocks, you need to
understand how that company makes
its money and how it will continue to
do so into the future.

Years ago Kodak was a secure
investment.

It had invented the personal camera
and dominated the production of
camera film and its processing for
photos.

Then digital came along and Kodak’s
business plan did not work anymore.

Apple stock dropped a few percent
just this morning.

One of their suppliers, Lumentum,
reported that a large customer was
reducing orders.

The “bump in the road” interpretation
is that Apple is just adjusting for a
slower part of their business cycle.

The “sea change” interpretation is
that there is not much more room for
Apple to expand their market share
and that technological innovation
elsewhere in the tech world will start
doing damage to their business plan.

Why Is There a Flight to Quality Investments?

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Why Is There a Flight to Quality Investments?