The US-China trade conflicts are likely to get reflected in U.S. companies’ Q3 earnings results. Rise in benchmark bond yield that resulted in steeper borrowing costs for both corporates and individuals is also a dampener. The drab investment scenario shifts the spotlight to defensive companies. Such stocks provide risk-adjusted returns and steady earnings, regardless of the state of the equity market.
Extended Stock Market Rout
The broader S&P 500 fell for the fifth straight session on Oct 23 and is off nearly 6% so far this month. In fact, the broader index is now trading below its 200-day moving average as stocks continue to struggle. By the way, market analysts consider moving averages as a dividing line of bullish and bearish momentum of an asset. Chief market technician at MKM Partners, JC O’Hara further added that ”the average S&P 500 stocks are off minus 17% from its 52-week high, and this shows just how much selling has already occurred.”
The Dow Jones Industrial Average has also declined for two straight days and has shed 4.8% thus far this month. The Nasdaq, in the meantime, has gone through a volatile stretch this month and is down 7.6%. The tech-laden index, thus, is almost on the verge of slipping into the correction territory. At the same time, market volatility continues to be high, with the Cboe Volatility Index (VIX) reading 21.24. Market pundits view VIX below 12 as low and more than 20 as high.
What’s Haunting the Markets?
Strained trade relation between the United States and China dragged the equity market down. U.S. tariffs on $200 billion worth of Chinese products applied last month at a rate of 10% are expected to increase to 25% by the end of this year. Tariffs are widely expected to have an adverse effect on corporate profits, with about 30 companies already mentioning its negative impact during earnings call so far, per Bank of America’s Savita Subramanian. In fact, major Dow components 3M Company MMM and Caterpillar Inc. CAT issued downbeat 2018 guidance in their latest quarterly reports mostly due to the adverse effects of tariffs.
Rapidly climbing benchmark bond yield has fueled fears that the profit margins of U.S. corporates will get hurt by steeper borrowing costs. This escalating cost of borrowing had a negative impact on mega-capitalization companies like Facebook, Inc. FB, Amazon.com, Inc. AMZN, Netflix, Inc. NFLX and Alphabet Inc. GOOGL. Lest we forget, these players better known as FANG stocks do have an outsize impact on the broader market by dint of their market values.
At the same time, the rate on fixed-rate mortgages goes up with an uptick in the 10-year Treasury note. Thus, individuals looking to buy a home or condo will also be hurt as the cost of financing the purchase will increase as rates go up. The Fed, by the way, has raised its federal funds rate three times this year and that typically spells short-term jitters for stocks, especially, now when the equity market is deemed lofty by some measures.
President Trump has also partly blamed the Fed for the market adversities. He said that “I think the Fed is making a mistake. It’s so tight, I think the Fed has gone crazy.” After all, the equity market did enjoy a bull run for a prolonged period of time, mostly due to ultra-low yields.
But it’s not over. Political drama in Europe related to Italy’s budget row and Britain’s efforts to exit the European Union have also hurt inventors’ sentiments.
Take Refuge in These 4 Top Stocks
As markets continue to gyrate, defensive stocks seem to be the safest investment options. Such stocks are generally non-cyclical or companies whose performance and sales are not highly correlated with activities in the broader market. Their products are in constant demand irrespective of market volatility and such names include companies from the utilities and consumer staples sectors.
Utilities are deemed defensive stocks as electricity, gas and water are essentials. Food, beverage and tobacco companies are true defensive plays as demand for such staple stocks remains unaffected by market gyrations.
We have, thus, selected four such stocks that sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Ameren Corporation AEE operates as a public utility holding company in the United States. The Zacks Consensus Estimate for its current-year earnings rose 1.9% in the last 60 days. The company is expected to return 15.6% this year, better than the industry’s estimated return of 7.2%.
American Electric Power Company, Inc. AEP is an electric public utility holding company. The Zacks Consensus Estimate for its current-year earnings rose 1.3% in the last 60 days. The company is expected to return 11.8% in the current quarter, better than the industry’s estimated return of 9.4%.
Portland General Electric Company POR is an integrated electric utility company. The Zacks Consensus Estimate for its current-year earnings climbed 0.4% in the last 60 days. The company is likely to return 13.6% in the current quarter, higher than the industry’s estimated return of 9.4%.
The Chefs' Warehouse, Inc. CHEF distributes specialty food products in the United States. The Zacks Consensus Estimate for its current-year earnings rose 1.3% in the last 60 days. The company is expected to return 77.3% this year, better than the industry’s estimated return of 5.6%.
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American Electric Power Company, Inc. (AEP) : Free Stock Analysis Report
Portland General Electric Company (POR) : Free Stock Analysis Report
Ameren Corporation (AEE) : Free Stock Analysis Report
Netflix, Inc. (NFLX) : Free Stock Analysis Report
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Facebook, Inc. (FB) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
3M Company (MMM) : Free Stock Analysis Report
The Chefs' Warehouse, Inc. (CHEF) : Free Stock Analysis Report
Caterpillar Inc. (CAT) : Free Stock Analysis Report
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