Heightened trade tensions between the United States and China led to heavy losses for U.S. equity markets last week. For the S&P 500 and Nasdaq, it was the worst week of the year. However, a strong rebound occurred on May 10, after Treasury Secretary Steven Mnuchin indicated that the ongoing talks have been constructive. His views were shortly echoed by a tweet from President Trump.
In fact, market watchers are betting that the so called “Trump Put” will prevent an equity market collapse. This essentially means that Trump is mindful of the pressure his protectionist tactics place on the economy and financial markets. This is why he retreats from seemingly non-negotiable positions whenever downside risks get out of hand.
At the same time, this perception prevents investors from panicking beyond a point, allowing Trump to engage in his characteristic brinkmanship. This means that markets still retain upside but established names could outperform lesser known peers. With their large capital base and strong reputation, blue-chips may prove to be the best option for investors in the months ahead.
Markets Rebound on Trade Deal Hopes, Worries Remain
On May 10, the Dow closed the day more than 100 points higher. This represents a massive rebound from the 358-point plunge that the blue-chip index suffered after tariffs on $200 billion of Chinese goods increased after midnight. The S&P 500 ended a four-day losing streak while the Nasdaq closed marginally higher.
The rebound was initially triggered by comments from Steven Mnuchin, who categorized the ongoing trade talks as “constructive.” His views were bolstered by a tweet from President Trump which boosted stocks to session highs. Trump echoed Mnuchin, adding that his relationship with president Xi remains strong. Trump also said trade negotiations are set to continue.
Does the “Trump Put” Reduce Downside Risk?
Several analysts believe that Friday’s equity market recovery is wholly attributable to the “Trump put.” A put is a kind of option which allows investors to limit their losses. For instance, fixing a put strike price of $20 on a stock purchased for $30 a share limits losses to no more than $10 per share.
Trump has indicated time and again during his presidential term that he will play a similar role for the equity markets and the economy. While he adopts seemingly non-negotiable positions, especially on trade, the U.S. President retreats whenever downside risks seem to be getting out of hand.
For instance, stocks were in free fall at the end of last year with recession risks looming large. Then, early this year, constructive U.S.-China trade talks reinvigorated equity markets. In particular, a meeting held in the Oval Office on Feb 22 sparked off a furious market rally, which has boosted stocks by nearly 15% so far this year.
However, there is a flip side to this argument. Since investors believe that Trump will curb market losses beyond a point, stocks tend to limit losses even when near-term risks, such as trade tensions, heighten. This allows Trump to take an even tougher stance on prickly issues.
This was clearly illustrated by comments made by the U.S. President on the morning of May 13. Trump tweeted once again that China “broke the deal” and “tried to renegotiate.” He also asserted that the United States is “where we want to be” on trade negotiations with China.
Several market watchers think that President Trump will not allow downside risks for the markets and economy to get out of hand. This is exactly why he steps from seemingly non-negotiable positions when a collapse looks imminent.
However, this could also allow him to engage in unnecessary brinkmanship on such sensitive issues. Investing in blue-chip stocks during a volatile period looks like a smart option. We have narrowed down our search based on a Zacks Rank #1 (Strong Buy) and other relevant metrics. You can see the complete list of today’s Zacks #1 Rank stocks here.
Comcast Corporation CMCSA is a global media and technology company with three primary businesses: Comcast Cable, NBCUniversal and Sky.
Comcast’s projected growth for the current year is 14.4%. Its earnings estimate for the current year has improved by 3.3% over the past 30 days.
Banco Bradesco S.A. BBD offers banking and financial services in Brazil and globally.
Banco Bradesco’s projected growth for the current year is 10.6%. Its earnings estimate for the current year has improved by 1.8% over the past 30 days.
Lloyds Banking Group plc LYG offers banking and financial services in the United Kingdom and on a global basis.
Lloyds Banking Group’s projected growth for the current year is 8.4%. Its earnings estimate for the current year has improved by 13.9% over the past 30 days.
Roper Technologies Inc. ROP designs, manufactures and distributes medical and scientific imaging products and software, radio frequency (RF) products, services and application software, industrial technology products, energy systems, and control products and solutions.
Roper Technologies’ projected growth for the current year is 8%. Its earnings estimate for the current year has improved by 5% over the past 30 days.
Ericsson ERIC is a leading provider of communication networks, telecom services and support solutions.
Ericsson’s projected growth for the current year is more than 100%. Its earnings estimate for the current year has improved by 16.5% over the past 30 days.
Zacks' Top 10 Stocks for 2019
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Ericsson (ERIC) : Free Stock Analysis Report
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