Here’s the defensive stock-market trade that works no matter where bond yields end up

Johnson & Johnson is among the low-volatility companies underperforming this year but ready for takeoff, says JPMorgan. - Johnson & Johnson

Investors are returning from the long weekend with some optimism as that old chestnut — hopes for an Iran peace pact — is helping push bond yields lower and stock futures higher.

JPMorgan strategists note that they have been telling investors to buy the dips since the second half of March — the S&P 500 SPX has gained nearly 13% since. But in our call of the day, a team at the bank led by Mislav Matejka flags a group of equity-market stragglers it expects to see outperform, no matter what direction bond yields take.

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They JPMorgan team is talking about low-volatility stocks — the quintile of the market with the lowest variation in price moves: staples, healthcare, utilities, insurance and some industrials that have done “poorly” in the past few months. Those include Procter & Gamble PG, Coca-Cola KO, Dover DOV, Johnson & Johnson JNJ and American Electric Power AEP, or Nestlé CH:NESN and Roche CH:RO in Europe.

“So far this year, low vol stocks have displayed a clear inverse correlation to bond yields. The recent underperformance of these stocks is consistent with the move up in yields; since the start of the [Mideast war on Feb. 28], U.S. low vol stocks have fallen by 6%, with bond yields higher by 55 [basis points],” said the strategists.-

“Last week we argued that this could be an opportunity to add to these stocks and we believe that this call is relevant irrespective of where bond yields go from here,” they said.

Should the 10-year yield BX:TMUBMUSD10Y spike again, as it did recently in a move toward 5%, then the overall market is likely to struggle, said Matejka and the team. Based on history, long yields at 5% drive up worries over potential adverse effects on the economy and stock valuations, they noted.

This backdrop could see those low-volatility stocks break out of an inverse correlation with bond yields, they explained.

“The group could outperform in such a scenario as investors tend to prioritize capital preservation in uncertain environments and move to safer, defensive spaces. We therefore see a compelling case for this group going forward, regardless of the direction of rates.”

The fact that those stocks have already been weak performers also makes for a better entry point for investors. “The stocks do not appear stretched, and offer high dividend yields,” said the JPMorgan team.

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And if recent spiking bond yields prove to be nothing more than a scare and those yields go nowhere? Low-volatility stocks “could reflect this in a positive way, as in the early part of the year when they posted a spell of outperformance, ahead of the Iran conflict.”

Overall, Matejka and team say they expect bond yields and oil prices will be lower from here over the next six to 12 months. “Our medium term bias is toward lower yields, and we believe the above-described low vol trade is worth considering now given the attractive entry point on the back of past weakness, and given that it is likely to work in a range of macro scenarios from here.”

The strategists said they believe markets are looking at a different setup from 2022, when accelerating wages from COVID-era issues caused stubbornly rising inflation and forced central banks to hike. They don’t think central banks will be hiking as much as the market is implying.

One key reason is that a wage-price stagflationary spiral is going to have a tough time taking hold as rising fears of AI disruption are making it harder to find a job.

And, even if oil prices are going higher, central banks may not need to “address what is a potential demand destruction shock.”

Here are the S&P 500 stocks in JPMorgan’s U.S. low-volatility basket, based on low volatility, low earnings volatility, high net-income margin, and a high correlation with a quality dividend and a dividend above 1%:

CBOE Cboe Global Markets Financials 3.9% 42.4% JNJ Johnson & Johnson Health Care 3.3% 13.2% MO Altria Group Inc Consumer Staples 3.0% 28.2% DOV Dover Corp Industrials 2.9% 7.5% EVRG Evergy Utilities 2.8% 15.8% AEP American Electric Power Utilities 2.8% 14.1% FRT Federal Realty Investment Trust Real Estate 2.8% 18.8% NI NiSource Utilities 2.8% 14.6% ATO Atmos Energy Utilities 2.8% 6.1% KO Coca-Cola Consumer Staples 2.7% 16.5% CME CME Group Financials 2.7% 8.8% LNT Alliant Energy Utilities 2.7% 13.8% SNA Snap-on Industrials 2.6% 6.4% O Realty Income Real Estate 2.6% 10.0% AEE Ameren Utilities 2.5% 11.4% AFL Aflac Financials 2.5% 6.9% VZ Verizon Communications Communication Services 2.5% 18.7% SO Southern Co Utilities 2.4% 8.4% WEC WEC Energy Utilities 2.4% 7.5% HON Honeywell International Industrials 2.4% 16.8% DUK Duke Energy Utilities 2.4% 7.2% ROL Rollins Industrials 2.4% -10.9% ITW Illinois Tool Works Industrials 2.4% 2.4% ALLE Allegion Industrials 2.3% -18.1% AMP Ameriprise Financial Financials 2.3% -7.8% WM Waste Management Industrials 2.3% -0.8% YUM Yum! Brands Consumer Discretionary 2.3% 2.6% CL Colgate-Palmolive Consumer Staples 2.3% 14.7% PEG Public Service Enterprise Utilities 2.2% -1.0% MCD McDonald’s Consumer Discretionary 2.1% -7.6% MDLZ Mondelez International Consumer Staples 2.1% 14.7% ICE Intercontinental Exchange Financials 2.1% -5.6% MDT Medtronic Health Care 2.1% -18.2% AWK American Water Works Utilities 2.0% -4.1% PG Procter & Gamble Consumer Staples 2.0% 0.8% JKHY Jack Henry & Associates Financials 1.8% -23.2% MAA Mid-America Apartment Communities Real Estate 1.8% -5.6% ADP Automatic Data Processing Industrials 1.7% -12.4% KMB Kimberly-Clark Corp Consumer Staples 1.6% -1.7% MRSH Marsh & McLennan Financials 1.6% -11.5% ABT Abbott Laboratories Health Care 1.5% -30.2% GIS General Mills Consumer Staples 1.3% -27.5% SOLS Solstice Advanced Materials Materials 0.2% 68.3% Average 4.9%

The markets-

U.S. stock futures ES00 YM00 NQ00 are higher. Oil futures are above their lowest levels of the weekend but still much lower than Friday’s levels. Bond yields BX:TMUBMUSD10Y are easing.

Key asset performance Last 5d 1m YTD 1y S&P 500 7473.47 0.88% 4.30% 9.17% 28.79% Nasdaq Composite 26,343.97 0.45% 6.07% 13.35% 40.60% 10-year Treasury 4.5 -9.30 15.50 32.80 -1.80 Gold 4519.8 -1.12% -3.79% 4.33% 34.61% Oil 92.56 -9.69% -4.26% 61.23% 50.46% Data: MarketWatch. Treasury yields change expressed in basis points

The buzz

The U.S. carried out targeted “defensive” airstrikes against Iran late Monday, while President Donald Trump said deal negotiations were “proceeding nicely.”

Space stocks such as Redwire Space RDW, MDA Space MDA, Firefly FLY and Rocket Lab RKLB are climbing as excitement around a SpaceX IPO continues.

Pony AI’s stock PONY is rising. The China EV company reported a quintupling of robotaxi revenue as well as wider losses.

A Honeywell International HON spinoff named Quantinuum has just set terms for an IPO.

Ferrari shares RACE IT:RACE are dropping as markets appear to hate its new electric vehicle as much as social media do.

The S&P Case-Shiller 20-city home-price index for March is due at 9 a.m., followed by May consumer confidence at 10 a.m.

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The chart-

The chart shared by Rory Johnston, founder and CEO of Commodity Context, shows a 40% drop in China oil imports this year, due to the Iran conflict. Yet he notes on his Substack that the global economy seems to be humming along, meaning China is probably drawing more than expected from its own oil reserves. He calls that “the largest blind spot to the market’s collective statistical model of the oil industry.” That leaves the market now guessing “when China’s aggressive SPR support will be exhausted or otherwise withdrawn, which would prompt a renewed surge in upward pricing pressure,” he said. Read more here.

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Ticker Security name NVDA Nvidia TSLA Tesla MU Micron AMD Advanced Micro Devices TSM Taiwan Semiconductor Manufacturing GME GameStop RKLB Rocket Lab AMZN Amazon AAPL Apple INTC Intel

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