U.S. Senate Republicans revealed a tax plan that entails the deferment of corporate tax cuts for a year. Such a delay raised concerns about President Trump’s ability to pass laws, aggravated by the Wall Street ending an eight-week winning streak. After all, lowering of taxes was one of the major campaign promises made by Trump that helped push the major indices to a series of record highs since the 2016 presidential election. Add to this the high valuations and corporate debt plaguing the broader markets and the decade-long Bull Run is without a question nearing an end.
In the wake of such uncertainty, picking stocks isn’t easy. But there are ways to reduce the chances of making a bad investment. In such a scenario, stocks that are undisturbed by market gyration provide steady earnings growth and have higher market capitalization, making solid bets.
Tax Overhaul Ambiguity
The Senate seeks to delay the tax reduction plan until 2019. This hasn’t gone down well with investors as lowering of the corporate tax rate from 35% to 20% can strengthen the labor market and revitalize the economy. It will also encourage the world’s ingenious entrepreneurs to establish their business in the United States.
On top of it, the Senate added that the plan will impose a minimum of 10% on income from intangible assets like intellectual property. Multinational companies that generate a significant portion of non-U.S. profits from intellectual properties were in the line of fire. Notable among them are companies from the tech sector.
Tech & Banks Affected the Most
Tech companies, in the meanwhile, benefit immensely from the lowering of the tax rate. Their after-tax earnings improve leading to repatriation of trillions of dollars held abroad by such companies. Tech companies can use this extra cash for research and developments, and mergers and acquisitions. Hence, a possible delay in the much-anticipated corporate tax cuts resulted in a bout of selling of tech stocks.
Banks weren’t spared either. This is because lowering of corporate taxes will bolster investments and will be a boon for lenders. Adding to the trouble for banks was a flattest yield curve for a decade, which will affect an already weak interest income at the nation’s largest lenders.
Eight-Week Winning Streak Comes to an End
In fact, the broader equity market registered its first weekly loss in two months as investors remained wary after the congressional Republicans failed to make inroads with passing tax cuts. The 30-stock Dow Jones fell 39.73 points to close at 23,422.21 on Nov 10 and the S&P 500 index declined 1%, finishing at 2,582.3. Both the indices recorded an eight-week winning streak, their longest since 2013. Meanwhile, the index of small-cap stocks, the Russell 2000, fell 1.3% and posted its steepest weekly decline since August.
Volatility has crept back into the markets. The CBOE Volatility Index (VIX), a gauge which uses options-trading data to measure implied volatility of S&P 500 stocks, jumped 9.6% to close at 11.51. VIX also ended the week slightly above its 2017 average after touching a record low the week earlier.
Other Potential Red Flags
Not only the delay in tax reforms, markets are flashing several warning signs. The biggest roadblock is lofty valuations. The bull market already stretches back to March 2009 as a result the cyclically adjusted price-to-earnings (CAPE) ratio of the S&P 500 is well above 31, the second-highest valuation in a century as per Lyn Alden, founder of Lyn Alden Investment Strategy, in Atlantic City, NJ. It now lags valuations seen in the late 1990s dot-com bubble.
We should also remember that there is too much risk in the Bull Run as the gains are concentrated on certain stocks. According to David Winters, CEO of Wintergreen Advisers and portfolio manager of Wintergreen Fund such stocks include Alphabet (GOOGL - Free Report) , Amazon.com (AMZN - Free Report) , Apple (AAPL - Free Report) , eBay, Facebook, Microsoft Corp., Netflix, Priceline (PCLN), Salesforce (CRM) and Starbucks Corp. (SBUX), all have gained an average of 29% so far this year. They have also contributed almost a third of the S&P 500’s return since the end of 2014.
Last but not the least, corporate debt ceiling is on the rise. As per JP Morgan’s recent ‘Guide to Markets’, corporate debt as a percentage of gross domestic product (GDP) touched 45% the highest in recent history.
Time to Buy Ultra-Safe Stocks: 5 Solid Choices
With the markets apprehending a healthy pullback after a strong run, investing in stocks that are immune to market gyrations seems judicious. The best way to go about doing this is by creating a portfolio of ultra-safe stocks.
They essentially have a low beta, which makes them less volatile than the markets they trade in. In this case, a low beta ranges from 0 to 1. They also have large market capitalization (a market capitalization value of $10 billion or more), which helps them provide steadily-increasing earnings growth without having much risk of collapsing. Additionally, such stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Exxon Mobil Corporation (XOM - Free Report) explores for and produces crude oil and natural gas. Recently, the company has a Zacks Rank #2 and a beta of 0.84. Exxon Mobil’s expected growth for the current year is 52.7%, higher than the industry’s projected growth of 23.1%. The company’s expected growth for the next year is a solid 12.3%.
Visa Inc. (V - Free Report) operates as a payments technology company. Currently, the stock has a Zacks Rank #2 and a beta of 0.97. Visa’s expected growth for the current year is 16.4%, more than the industry’s projected growth of 5.4%. The company’s expected growth for the next year is a steady 15.6%.
Johnson & Johnson (JNJ - Free Report) researches and develops, manufactures, and sells various products in the health care field. The company currently possesses a Zacks Rank #2 and a beta of 0.82. Johnson & Johnson’s expected growth for the current year is 8.2%, higher than the industry’s projected growth of 6%. The company’s expected growth for the next year is a promising 7.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Estée Lauder Companies Inc. (EL - Free Report) manufactures and markets skin care, makeup, fragrance, and hair care products. Currently, the stock has a Zacks Rank #1 and a beta of 0.68. Estée Lauder Companies’ expected growth for the current year is 19.4%, more than the industry’s projected growth of 11.6%. The company’s expected growth for the next year is a steady 11.5%.
Dollar Tree, Inc. (DLTR - Free Report) operates variety retail stores. The company has a Zacks Rank #2 and a beta of 0.59. Dollar Tree’s expected growth for the current year is 22.3%, higher than the industry’s projected growth of 14.9%. The company’s expected growth for the next year is a solid 8.5%.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
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