There is little optimism on the bourses, with tensions brewing between North Korea and the West. Apart from the geopolitical scenario, the lack of clarity on President Trump’s pro-business agendas also raises concerns for investors.
Investors are, thus, exiting risky stocks and banking on traditional safe havens like utilities and gold. With Federal Reserve officials seeing little chance of another rate hike this year on subdued inflation, demand for such safe havens has strengthened. Hence, investing in such stocks seems to be sensible at the moment.
Markets Face Bumpy Road, Volatility Spikes to Two-Week High
The Dow Jones saw its steepest one-day drop on Sep 5 since Aug 17, tanking 234.2 points to close at 21,753.31. The S&P 500 also shed 18.70 points, or 0.8%, to close at 2,457.85. Eight of the benchmark index’s sectors ended in the negative territory, with financials seeing the worst day since May 17. The tech-laden Nasdaq Composite declined 59.76 points, or 0.9%, to close at 6,375.57. Shares of all its major components including Apple Inc. (AAPL - Free Report) , Amazon.com, Inc. (AMZN - Free Report) , Facebook Inc (FB - Free Report) and Alphabet Inc (GOOGL - Free Report) ended in the red. In small caps, the Russell 2000 Index fell 13.92 points, or almost 1%, to finish at 1,399.66.
The Chicago Board Options Exchange (CBOE) Volatility Index skyrocketed 21.2% to close at 12.28. The CBOE VIX, so-called “fear index” registered its biggest gain since Aug 17. Tensions in the Korean peninsula and lack of political policy progress have unnerved investors.
North Korea’s Nuclear Test Rattles Markets
Equity markets started the week on a cautious note, as tensions between North Korea and the United States escalated after the rogue nation conducted its sixth and most powerful nuclear test ever. It’s an advanced hydrogen bomb that can be placed on an intercontinental ballistic missile (ICBM). South Korea’s Defense Ministry, in the meanwhile, warned that the North Korea is preparing to launch another ICBM. It conducted its first two ICBM test launches in July.
The White House reacted strongly and warned North Korea that military actions are still on the table if Pyongyang threatens the United States or its allies. Defense Secretary James Mattis said any attacks on the United States, Japan or South Korea “will be met with a massive military response, a response both effective and overwhelming.”
The increasing number of nuclear tests and the United States’ warning to North Korea indicate that the tensed situation might last longer.
Lack of Progress on Trump’s Growth Agenda Heightens Tension
Investors also kept an eye on debt ceiling and budget negotiations this month. If a deal is not reached then it could lead to a government shutdown. Beth Ann Bovino, chief economist at S&P Global Ratings, added that “failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers and would erase many of the gains of the subsequent recovery.”
A government shutdown will result in a loss of $6.5 billion for the economy each week. In fact, such a shutdown will result in the holdup of all non-emergency government funding such as worker furloughs, closing of public offices, shutdown of national parks and interruptions in implementation of pro-business policies.
Fed Caution on Inflation, Rate Hike
The Fed, in the meanwhile, is adopting a more dovish stance, with three policymakers expressing doubts over further rate hikes this year. Fed Governor Lael Brainard said that the central bank needs to slow down the pace of rate hikes owing to subdued inflation.
Minneapolis Federal Reserve Bank President Neel Kashkari went even further. Kashkari said that “it’s very possible that our rate hikes over the past 18 months are leading to slower job growth, leaving more people on the sidelines, leading to lower wage growth, and leading to lower inflation and inflation expectations.” President of the Dallas Fed also added that the central bank needs to show patience on rate increases as growth is slow.
Inflation has not hit the Fed’s 2% annual target in the past five years. The Fed's preferred gauge now stands at 1.4%.
Buy These 4 Safe-Haven Stocks
Investors seek traditional safe havens like utilities during periods of geopolitical uncertainty. This is because such sectors provide high dividend payments, which often lowers a stock’s downside risks. To top it, such sectors have less exposure to economic cycles than most other industries.
Utilities, in the meanwhile, are capital-intensive as they continuously need funds for carrying on with infrastructure upgrades and growth. Hence, higher interest rates mean increased cost of capital for utility companies. But, weak inflation reduced the chances of a third rate hike this year, which has in turn positively impacted utility companies.
Gold, another safe haven, touched a 1-year high buoyed by the nuclear standoff on the Korean Peninsula. Fading U.S. rate hike prospects also drove gold higher. With chances of a rate hike ebbing, the U.S. dollar weakened and in turn boosted the yellow metal.
We have, thus, selected four safe haven stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Golden Star Resources Ltd. (GSS - Free Report) is a gold mining and exploration company. The company sports a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings soared 50% over the last 30 days. The company has outperformed the industry in the past month (+14.1% vs +5.5%).
Just Energy Group Inc (JE - Free Report) is an energy management solutions provider engaged in electricity, natural gas, solar and green energy. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings surged 65.6% over the last 30 days. The company has outperformed the industry in the past month (+11.4% vs +1.9%). You can see the complete list of today’s Zacks #1 Rank stocks here.
Telecom Argentina S.A. (TEO - Free Report) provides fixed-line telecommunications and other telephone-related services to residential customers, businesses, and governmental agencies. The company has a Zacks Rank #1 and a VGM Score of A.The Zacks Consensus Estimate for its current-year earnings jumped 23.6% over the last 30 days. The company has outperformed the industry in the past month (+11.9% vs -1.6%).
Telecom Italia S.p.A. (TI - Free Report) , together with its subsidiaries, provides fixed and mobile telecommunications services. The company has a Zacks Rank #1 and a VGM Score of B.The Zacks Consensus Estimate for its current-year earnings improved 6.6% over the last 30 days. The company, which is part of the Diversified Communication Services industry, has given a positive return of 5% in the year-to-date period.
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