While Australian investors are enjoying a slight reprieve today with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) bucking Wall Street's negative lead overnight and adding around 0.4% by lunchtime, the index is still down 5.4% over the past month.
For many investors – particularly those concentrated in a handful of highly-prized dividend stocks such as Telstra Corporation Ltd (ASX: TLS) – the past few years have been outstanding thanks to the tailwind from the yield chase.
Telstra's share price, for example, is up 101% in the last five years and 15.7% in the past year alone. On top of these capital gains, investors have been receiving juicy fully franked dividends.
Where is the stock market headed?
Over the past few weeks, winds of caution and concern appear to have been blowing through markets globally and leading to a stalling of multi-year bull markets.
Concerns include: Greece's economic predicament; US earnings season producing mixed results; economists suggesting Australia is on the verge of a recession; and the ending of interest rate downgrade cycles in both the US and Australia.
While predicting market directions could be described as a (small f) foolish pursuit, it is worth considering how your portfolio may fare should a market plunge occur.
Stocks at risk
While very few stocks find favour during a market rout, some will generally fare better than others. Defensive businesses that have steady, maintainable earnings may see their stock prices hold up better.
For example, Sonic Healthcare Limited (ASX: SHC) provides essential radiography and pathology services which are less prone to economic and market factors. All healthcare stocks are not in the same boat however. Ramsay Health Care Limited (ASX: RHC) also has a defensive business but with its stock priced for perfection it could face more selling pressure in less jubilant times.
At the other end of the spectrum to defensive stocks are businesses that are highly leveraged to boom time markets – the financial services sector is a prime example.
Firms such as AMP Limited (ASX: AMP) earn fees from financial advice and fees based upon funds under management (FUM). In the good times more people seek advice and the average level of FUM is higher, when coupled with a relatively fixed cost base, the result in general is a strong upswing in profitability. Unfortunately the reverse is also true in a market downturn – average levels of FUM will diminish and less fee income is earned too.