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Major Indexes Hit Record High on Rate Cut Hope: 5 Top Picks

Nalak Das

The Wall Street rally, which started in June after a stock market mayhem in May, is continuing in July. All three major stock indexes --- the Dow, S&P 500 and Nasdaq Composite --- achieved new all-time highs on Jul 3. Notably, the rally has taken place at a time when a series of tepid economic data for the United States, the Eurozone, China, Japan and Australia raised concerns about global economic slowdown.

Indexes Hit Record Highs

On Jul 3, the Dow finished at 26,966, surpassing its all-time highest close on Oct 3. The S&P 500 ended at 2,995.82, marking its third all-time high within a week. The Nasdaq Composite closed at 8,170.23 after recording its new record, breaking the previous record posted on May 3.

Year to date, the Dow, the S&P 500 and the Nasdaq Composite have witnessed remarkable performance with gains of 15.6%, 19.5% and 23.1%, respectively. Importantly, all three indexes had a pathetic 2018, finishing in the red. In the first half of 2019, markets also suffered from volatility due to U.S. Treasury yield curve inversion and sudden breakdown of U.S.-China trade negotiations. Despite these factors, Wall Street witnessed impressive turnaround.

Rally is Not Broad-Based

While stock markets have provided blockbuster return to investors so far in this year, questions are being raised about the sustainability of the rally. Several economists and financial researchers have pointed out that the June rally is not broad-based, a prerequisite for continuation.

First,  during the past one month, only a handful of stocks soared achieving new 52-week highs. However, a broad-based rally always witnessed majority of stocks achieving 52-week highs. Moreover, volume of stocks traded during this time period remained muted.

Second, equity and bond generally move in different directions. When the stock market bull run continues, investors generally shift funds from low-income, safe-haven bonds to risky assets like equities. On the other hand, when investors' sentiment about market expectation dampens, funds flow in the reverse direction.

However, in the last three months, Wall Street is witnessing simultaneous bull run in equity and bonds. Consequently, U.S. Treasury yields fell to historic low level. This clearly indicates market's dilemma about the sustainability of the stock market bull run.

Market Contingent Upon Fed and Trade   

The stock market rally in June was primarily induced by strong expectations of interest rate cut by the Fed and renewed trade talk between the United States and China. At present, major concerns of the U.S. economy is the trade conflict with China. Although a quick solution to this problem is out of question, companies will heave a sigh of relief if the tariff war does not escalate further. A solution to the trade spat will also inject global economic growth.

Moreover, a dovish stance taken by the Fed since the beginning of this year is considered as a major boost to the U.S. economy. So far, the central bank has kept its benchmark leading rate at 2.25-2.5%, and has hinted at rate cuts this year itself.

On Jun 19, in his speech following the FOMC meeting, Fed chair Jerome Powell removed the term “patient’’ from the minutes and added that “the FOMC will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion." Investors are considering a rate cut at least by 25 basis points in July and one or two more cuts the rest of this year.

Our Top Picks

At this juncture, it will be prudent to invest in stocks from any of these three major stock indexes with a favorable Zacks Rank. We have narrowed down our search to five such stocks which have skyrocketed year to date and still have upside left. Also, these stocks provide a high dividend yield, which will act as a regular income stream to investors during market downturn. Each of our picks carries a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows price performance of our five picks year to date.

Cisco Systems Inc. CSCO designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry worldwide. The company has expected earnings growth of 18.5% for the current year. The stock has surged 30.4% year to date and has current dividend yield of 2.5%.

Microsoft Corp. MSFT a global software leader develops, licenses and supports software, services, devices and solutions worldwide. The company has expected earnings growth of 18% for the current year. The stock has surged 35.4% year to date and has current dividend yield of 1.4%.

Air Products and Chemicals Inc. APD provides atmospheric gases, process and specialty gases, equipment, and services worldwide. The company has expected earnings growth of 10.3% for the current year. The stock has surged 44.6% year to date and has current dividend yield of 2%.

Costco Wholesale Corp. COST operates an international chain of membership warehouses, mainly under the Costco Wholesale name. The company has expected earnings growth of 17.7% for the current year. The stock has surged 32.1% year to date and has current dividend yield of 1%.

Tractor Supply Co. TSCO is the largest operator of rural lifestyle retail stores in the United States. The company has expected earnings growth of 10.7% for the current year. The stock has surged 31.8% year to date and has current dividend yield of 1.3%.

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