Wall Street plummeted on Jun 25 as uncertainty rose out of a possible rate cut by the Fed in July and a positive outcome from the upcoming meeting between President Donald Trump and Chinese premier Xi Jinping. All three major stock indexes --- the Dow, S&P 500 and Nasdaq Composite --- plunged 0.7%, 1% and 1.5%, respectively. Notably, this is the worst single-day loss recorded by these indexes so far in June.
As investors’ appetite for risky assets like equities weakened to a large extent, flow of funds started shifting from equities to bond markets. Consequently, yields on safe-haven U.S. government bonds declined significantly.
U.S. Government Bond Yields Tumble
On Jun 25, yield on 10-year U.S. Treasury Note dropped 2.8 basis points to 1.994%, its lowest since Nov 8, 2016. The yield on the benchmark sovereign bond is however positively linked to mortgage rates. Meanwhile, yield on 2-year U.S. Treasury Note closed at 1.736% after touching an intraday low of 1.703%. Yield of this bond is sensitive to expectations of interest rate changes.
Moreover, yield on long-term, 30-year U.S. Treasury Note slid 2.5 basis points to 2.527% --- lowest since Oct 25, 2016. According to Bloomberg, year to date, investors have poured $72 billion in fixed-income ETFs. Total asset allocation for debt securities hit an all-time high of $741 billion.
Fed Dampens Immediate Rate Cut Hope
On Jun 25, in comments at the Council of Foreign Relations, Fed chairman Jerome Powell reiterated his monetary stance declared last week. Powell said that the downside risks to the U.S. economy have increased. Consequently, a growing number of Fed policymakers are looking for a rate cut.
However, he said that the Fed will take a wait-and-see approach to monitor how fast economic conditions are changing in recent times. The central bank also reaffirms its view that inflation will rise to 2% although it may take more time. Therefore, a rate cut in July cannot be taken for granted.
More importantly, James Bullard, president of the St. Louis Fed, who was most vocal about a rate cut in Fed’s FOMC meeting held last week, said that rate cut of a magnitude of 50 basis points is out of question at present. If a reduction does take place at all, it will be of maximum 25 basis points. Notably, per the CME FedWatch, traders have currently assigned 100% probability to a rate cut at least once in July.
U.S.-China Trade Conflict Lingers
President Donald Trump is scheduled to meet his Chinese counterpart Xi Jinping during the two-day G-20 summit in Japan later this week. Market participants are expecting that some sort of positive outcome will appear from this meeting, although a trade deal is a long way to go.
However, on Jun 24, Bloomberg reported that U.S. officials have little expectation from this meeting since the Trump administration is sticking to its demand that China should implement significant economic reforms, which will give U.S. companies a level playing field, and protect precious intellectual properties.
However, the Chinese Communist regime is highly unlikely to accept these demands. A deadlock may compel Trump to impose 25% tariff on another $300 billion Chinese goods later this year.
Our Top Picks
Under these circumstances, rate-sensitive investments like utilities, REITs and health care, with strong growth potential, will be prudent. We narrowed down our search to five such stocks, each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
Middlesex Water Co. MSEX owns and operates regulated water utility and wastewater systems. It operates in two segments, Regulated and Non-Regulated. The company has expected earnings growth of 10.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.9% over the last 60 days.
Atlantic Power Corp. AT owns and operates a fleet of power generation assets in the United States and Canada. The company has expected earnings growth of 50% for the current year. The Zacks Consensus Estimate for the current year has improved by 118.2% over the last 60 days.
The Howard Hughes Corp. HHC owns, manages and develops commercial, residential and hospitality operating properties in the United States. The company has expected earnings growth of 198.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 369% over the last 60 days.
Safehold Inc. SAFE is revolutionizing real estate ownership by providing a new and better way for owners to unlock the value of the land beneath their buildings. The company has expected earnings growth of 125% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.3% over the last 60 days.
Genesis Healthcare Inc. GEN owns and operates skilled nursing facilities and assisted/senior living facilities in the United States. The company has expected earnings growth of 53.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 23.4% over the last 60 days.
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