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Volatility Returns on Inflation Concern: 5 Top Low-Beta Picks

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The Wall Street rally faced hurdles in the first three trading days of this week, resulting in severe volatility. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have plunged 3.5%, 4.1% and 5.3%, respectively, so far this week. The CBOE VIX — market's best fear gauge — has jumped 65.3%. On May 12, the index touched above 28, for the first time since Mar 8.

Highly disappointing nonfarm payrolls in April clearly indicated that the labor market has a long way to go before reaching the pre-pandemic level. However, despite a struggling labor market, market participants are now mostly concerned about the impending inflation this year.

Several economists and financial experts believe that the core personal consumption expenditure (PCE) price index —- Fed favorite inflation gauge — will jump more than 2% forcing the central bank to change its existing accommodative monetary policies.

The recently released consumer price index (CPI) data for April, shortage of skilled laborers despite huge job openings and coronavirus-led disruptions in supply-chain systems have flared up concerns about inflation among investors.

Inflationary Expectations: A Major Concern

The U.S. economy is currently facing challenges of both demand-pull and cost-push inflation. The great reopening of the economy buoyed by the nationwide deployment of COVID-19 vaccines, record-breaking savings due to lockdown-imposed restrictions, massive fiscal and monetary stimulus and robust pent-up demand have resulted in demand-pull inflation.

On May 12, the Department of Labor reported that the consumer price index (CPI) — popularly known as household inflation — jumped 4.2% year over year in April, its highest since September 2008. Month over month, the CPI climbed 0.8% after increasing 0.6% in March. The core CPI (excluding volatile food and energy items) surged 0.9% in April after gaining 0.3% in March, marking the largest monthly gain since 1981.

Supply Side Disruptions

The pandemic-led disruptions in the supply chain system resulted in a shortage of inputs, especially high-end chipsets, among final product manufacturers. This in turn raised the prices of inputs that forced producers to increase prices of the final products.

Moreover, the shortage of skilled manpower forced businesses to increase wages and other benefits to attract laborers to meet the growing demand for their products. The average hourly wage rate increased 0.7% in April compared with a 0.1% drop in March.

On May 11, the Labor Department's monthly Job Openings and Labor Turnover Survey (JOLTS) report revealed that job openings jumped 597,000 to 8.1 million, the highest in the history of this data series that commenced in December 2000.

However, the economy added just 266,000 jobs in April significantly below the consensus estimate of 1.035 million. Moreover, 78,000 less jobs were added in February and March together than reported earlier. The shortage of skilled laborers is the primary reason for this huge disappointment.

Some financial experts blamed the $1,400 direct check payment to Americans and a $300 weekly supplement extended up to early September as part of Biden's $1.9 fiscal stimulus as reasons for skilled laborers to avoid the job market.

Fed's Policies in Watch

The Fed has so far maintained that any inflation above its targeted 2% in 2021 will be transitory. The pathetic nonfarm payroll data of April and the fact that 9.8 million people were recorded as officially unemployed in April compelled the central bank to allow inflation to remain above 2% till the time the labor market reaches the pre-pandemic level.

Some Fed officials have also said that the 4.2% year-over-year CPI jump in April was mainly due to a low base last year, when CPI reached its lowest level last year due to coronavirus-led lockdowns. These officials said that more data will be needed for the central bank to change its current ultra-dovish monetary stance.

Our Top Picks

At this juncture, it will be prudent to invest in low-beta (beta value less than 1 but greater than zero) stocks with a favorable Zacks Rank as these will be less volatile than the broader market. We have narrowed down our search to five low-beta stocks that have strong growth potential for 2021 and witnessed solid earnings estimate revisions in the past 30 days.

Moreover, these companies are regular dividend payers providing an important income stream during market's downturn. Each of our picks rallied nearly 15% or above in the past three months and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

Cincinnati Financial Corp. CINF provides property casualty insurance products in the United States. It operates in five segments: Commercial Lines Insurance, Personal Lines Insurance, Excess and Surplus Lines Insurance, Life Insurance, and Investments.

The company has an expected earnings growth rate of 25.3% for the current year. The Zacks Consensus Estimate for the current year has improved 3.5% over the past 30 days. The stock has a beta of 0.66 and a dividend yield of 2.13%. The stock price has jumped 26.6% in the past three months.

Archer-Daniels-Midland Co. ADM procures, transports, stores, processes and merchandises agricultural commodities, products, and ingredients in the United States and internationally. It operates through three segments: Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition.

The company has an expected earnings growth rate of 19.5% for the current year. The Zacks Consensus Estimate for the current year has improved 10.6% over the past 30 days. The stock has a beta of 0.90 and a dividend yield of 2.21%. The stock price has climbed 19.4% in the past three months.

Tradeweb Markets Inc. TW builds and operates electronic marketplaces in the Americas, Europe, the Middle East, Africa, Asia Pacific, and internationally. Its marketplaces facilitate trading in a range of asset classes, including rates, credit, money markets, and equities.

The company has an expected earnings growth rate of 19.9% for the current year. The Zacks Consensus Estimate for the current year has improved 2.5% over the past 30 days. The stock has a beta of 0.80 and a dividend yield of 0.39%. The stock price has appreciated 16.6% in the past three months.

Watsco Inc. WSO is the largest distributor of Heating, ventilation and air conditioning equipment, as well as related parts and supplies in the United States, Canada, Mexico, and Puerto Rico.

The company has an expected earnings growth rate of 19.5% for the current year. The Zacks Consensus Estimate for the current year has improved 12.2% over the past 30 days. The stock has a beta of 0.77 and a dividend yield of 2.61%. The stock price has advanced 16% in the past three months.

Lennox International Inc. LII designs, manufactures, and markets a range of products for the heating, ventilation, air conditioning, and refrigeration markets in the United States, Canada, and internationally. It operates through three segments: Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration.

The company has an expected earnings growth rate of 18.1% for the current year. The Zacks Consensus Estimate for the current year has improved 5.4% over the past 30 days. The stock has a beta of 0.85 and a dividend yield of 0.89%. The stock price has surged 14.8% in the past three months.

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Watsco, Inc. (WSO) : Free Stock Analysis Report

Archer Daniels Midland Company (ADM) : Free Stock Analysis Report

Cincinnati Financial Corporation (CINF) : Free Stock Analysis Report

Tradeweb Markets Inc. (TW) : Free Stock Analysis Report

Lennox International, Inc. (LII) : Free Stock Analysis Report

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