The first quarter of 2023 has been a volatile one. That’s because, on the one hand, inflation remains high, and on the other, retail sales have been on the rise. This has triggered fears in the market that the economy is resilient enough for the Fed to raise interest rates even more. Interestingly, blue chip stocks continue to show high resilience despite the market turmoil.
So, what is a blue-chip stock? These are the shares of high market cap companies. These companies also tend to dominate their core markets – their brands are strong. For instance, Coca-Cola is such a strong brand that it is recognized globally as a leader in the soft drinks market.
What Makes Blue Chip Stocks Safe Havens?
Blue Chips can weather rough markets because investors have faith in them. This means investors turn to these stocks for safety and growth because their core businesses can survive under any market conditions.
For instance, despite the highly volatile market conditions in the first quarter of 2023, two blue chips have done pretty well for investors. These are Microsoft (MSFT) and McDonald’s Corporation (MCD).
One thing that these two companies have in common is that they dominate their core markets. Microsoft is one of the most dominant tech companies in the world whose products are needed regardless of market conditions. Similarly, Mcdonald’s is one of the largest fast-food chains in the world, which means its foods are in high demand in tough economic times.
Blue Chips like Microsoft and MacDonalds also have billions of dollars in cash flows and reserves. As such, investors are usually confident that regardless of the market conditions, the odds of such companies going under are quite low.
Strong Returns On Blue Chips
Historically, blue chip stocks do well under all market conditions. In bull markets, growth stocks outperform them, giving investors a decent return. However, it is in bear markets that blue chips get to shine as investors seek safety above profits.
For instance, 2023 is a high-interest rates environment, and investors expect growth companies to suffer liquidity issues as borrowing costs rise and banks become more cautious about who they lend.
These are issues that do not affect blue chip stocks. These companies already have billions of dollars in cash flows and equally billions in cash reserves. Thanks to their strong brand names, banks also have an easier time lending to them than smaller companies. These are companies that both lenders and investors expect to do well long term.
The adaptive ability of blue chips
Besides the fact that these companies have easy access to financing and already have established brands, blue chips also have an easy time implementing innovations within their markets. This helps them keep revenues growing, creating a self-fulfilling cycle of stability and brand equity growth.
For instance, artificial intelligence is one of the technologies expected to change the world. While small companies make headways in this space, the blue chips, such as Microsoft, have leveraged their resources to make the most of the tech.
Conclusion
Thanks to their strong brand names, cash flows, and easy access to financing, blue chip stocks tend to draw in investors in bear markets. This leads to better capital preservation and growth regardless of a slowdown in the broader stock markets. This also means savvy investors should consider including blue chip stocks in a comprehensive, diversified portfolio. By having these stocks in a stock portfolio, there is a lower chance of getting wiped out when markets cool off for whatever reason. There is a good reason why institutional investors are heavily into blue chips – it’s a wise investment.
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