Stocks witnessed the worst one-day slide since last October, with both the Dow Jones and the S&P 500 losing more than 1%. It seems that the honeymoon period for Wall Street and President Trump has come to an end as investors turned restless owing to the slow progress in healthcare and financial reforms.
The markets also bore the brunt of expensive stocks, as well as fresh fears that the economic rebound might not be as robust as anticipated. With the markets apprehending a healthy pullback after a strong run, investing in sound stocks that are unperturbed by market gyrations seems judicious.
Fear Grips Markets
The Dow Jones Industrial Average slipped almost 238 points or 1.1% on Mar 21, the highest one day point and percentage loss since blue chips fell 1.4% on Sep 13, 2016. The S&P 500 also suffered its worst day one-day slide since Oct 11, 2016. The benchmark index slipped more than 1% for the first time in 110 trading sessions while the tech-laden Nasdaq that includes many hot stocks such as Apple Inc. (AAPL - Free Report) , Facebook, Inc. (FB - Free Report) and Amazon.com, Inc. (AMZN - Free Report) also had its worst day since Sep 9, 2016. The small-cap Russell 2000 index, in the meantime, wiped out all of its year-to-date gains.
The recent market weakness seems to be a signal that investors have adopted a more negative stance. The CNNMoney’s Fear & Greed Index, that tracks seven measures of market sentiments, is showing signs of Fear. Just a month ago it had indicated Extreme Greed. This goes to show how quickly emotions surrounding the Wall Street change.
The CBOE Volatility Index (VIX), a preferred gauge of stock market stress, climbed almost 10% to 12.47 on Mar 21, the highest since Mar 1. The index is also 7.69% above its 50-day moving average, which shows that investors are concerned about the near-term value of their portfolios.
Trump Rally Wanes
Wall Street experts believe that the market, which enjoyed a continual rise since Trump’s win, spiraled down on fears that his pro-growth agenda was getting bogged down in politics. Slow progress in healthcare and financial reforms now has investors on tenterhooks.
Traders worry that the efforts to pass a Republican healthcare bill through the Congress will delay Trump’s other economic policies including tax cuts and passage of an infrastructure spending bill. The Republican-controlled House did revise its bill to replace Obamacare but it is not clear whether the amendments are enough to ensure success at the Senate. Speaker Paul Ryan’s bill, designed to replace Obamacare, has already been criticized by both sides of the aisle. Following this, the Health Care Select Sector SPDR ETF (XLV), which includes drug makers and big insurance companies, fell around 0.8%.
Such uncertainty over how and when the administration will implement regulatory reforms also spooked banks. Such stocks had, earlier, rallied on Trump’s promises that the administration will relax financial rules and regulations including rollback of the Dodd-Frank act. The Fed, in the meantime, signaled at two more rate hikes by the end of the year, which has been sheer disappointment for traders who expected a more hawkish tone on the pace of the tightening cycle, eventually affecting banks (read more: 5 Biggest Winners from the Fed Rate Hike).
Banking behemoths including Bank of America (BAC - Free Report) plunged nearly 6%, while JPMorgan Chase (JPM - Free Report) and Wells Fargo (WFC - Free Report) were down about 3%, with the Financial Select Sector SPDR ETF (XLF) falling nearly 3%.
In fact, more or less, all the sectors took a beating on concerns that Trump’s plan to slash taxes for corporations and individuals will be stalled, while energy shares fell as oil prices dropped yet again.
Investors Fear Stocks are Overvalued
The Wall Street’s relentless Trump rally is also poised to finally take a breather as almost 34% fund managers say that stocks are “overvalued”, according to a Bank of America Merrill Lynch survey. This was the highest number of fund managers saying that stocks are overrated in the 17-year history of the survey, which polled 165 such mangers controlling $500 billion in assets.
An increasing number of market insiders have raised concerns about the elevated levels of popular valuation metrics. The S&P 500 is currently trading at 17.9 times forward earnings, the highest P/E ratio since 2004 and well above the five-year average of 15. Even Carl Icahn, a special advisor to Trump, said that he is worried that the market “has run ahead of itself”. He acknowledged that the Trump rally, which pushed the Dow up 2,400 points since the election, is based more on expectations than fundamentals.
Buy These 5 Safe Stocks Now
Not only did the history-setting bullish run for the Dow and the S&P 500 come to a screeching halt, investors continue to fear that the markets remain overheated. Amid all these, the U.S. estimated GDP growth for the first three months of this year has been declining since the beginning of March. The first quarter growth projections came down to 0.9% from roughly 2% three weeks ago, according to the Federal Reserve Bank of Atlanta.
Due to this market setback, investors should build a strategy on low-risk assets and a combination of parameters that lead to better returns. The best way to go about doing this is by creating a portfolio of low-beta stocks, which are inherently less volatile than the markets they trade in. In this case, a low beta ranges from 0 to 1. These stocks also boast a Zacks Rank #1 (Strong Buy) or 2 (Buy). Given the current valuations, investors could benefit from investing in such stocks.
Preferred Apartment Communities, Inc. (APTS - Free Report) invests in real estate markets of the U.S. It primarily acquires and operates multifamily apartment properties. Preferred Apartment Communities has a beta of 0.52 and a Zacks Rank #1.
Preferred Apartment Communities has a price-to-earnings (P/E) ratio of 8.95, below the industry’s 16.60, implying that the stock is quite a bargain. The company’s projected growth rate for the current year is 12.2%, more than the REIT and Equity Trust - Residential industry’s increase of 6.1%.
Big 5 Sporting Goods Corporation operates as a sporting goods retailer in western U.S. The company has a beta of 0.37 and a Zacks Rank #2.
Big 5 Sporting Goods has a P/E ratio (P/E) of 13.65, compared to the industry’s 20. The company’s projected growth rate for the current year is 35.4%, more than the Retail - Miscellaneous industry’s increase of 15.4%.
Magic Software Enterprises Ltd. (MGIC - Free Report) is a provider of application development, business process integration platforms and vertical software solutions. The company has a beta of 0.64 and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Magic Software Enterprises has a P/E ratio of 14.20, below the industry’s 69.90. The company’s projected growth rate for the current year is 27.3%, higher than the Computer - Software industry’s gain of 9.4%.
Tyson Foods, Inc. (TSN - Free Report) is a food company, which offers chicken, beef and pork, as well as prepared foods. The company has a beta of 0.16 and a Zacks Rank #2.
Tyson Foods has a P/E ratio of 12.53, compared to the industry’s 14.10. The company’s projected growth rate for the current year is 13.4%, more than the Food - Meat Products industry’s addition of 6.7%.
Acme United Corporation is a supplier of cutting, measuring, first aid and sharpening products to the school, home, office, hardware, sporting goods and industrial markets. It markets and sells in various brands, such as Westcott brand, First Aid Only, PhysiciansCare and Pac-Kit brands, and has operations in the U.S. The company has a beta of 0.72 and a Zacks Rank #2.
Acme United has a P/E ratio of 14.61, below the industry’s 21.90. The company’s projected growth rate for the current year is 8.5%, more than the Consumer Products - Discretionary industry’s increase of 3.5%.
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