U.S. stocks managed to arrest a two-day slide on Monday, even managing to close the session with meager gains. Though Monday’s gains came on the back of encouraging deal news, investors will continue to wait for further progress on the new tax policy.
However, experts believe that the likelihood of such reforms being implemented within this year is extremely unlikely. Further, the era of low interest rates which had fueled much of the markets’ gains is coming to an end worldwide with central banks rolling back their easy money policies.
Given this background, constant warnings about the exorbitant valuations of U.S. stocks may not seem as unrealistic as they did before. Some of these are rather bleak, going so far as to predict a decade long period of losses. However, the uncertainty created by the hurdles to the tax reform process and upcoming rate hikes means that it would make for a smart move to shore up your portfolios with some great value stock picks.
Investors Remain Uneasy About Tax Cut Prospects
The first weekly decline in two months was triggered on Nov 9 by the introduction of the Senate Republicans’ version of a tax cut legislation that entails the deferment of corporate tax cuts for a year. Such a delay raised concerns about President Trump’s ability to pass laws, leading the Dow to snap a seven-session streak of gains which itself was a product of tax cut hopes.
Of course, the market does have other catalysts and Monday’s gains came on the back of encouraging deal news. But investors will continue to await further progress on the new tax policy. However, experts believe that the likelihood of such reforms being implemented within this year is extremely unlikely.
Further, the version of the legislation introduced by the Senate Republicans is widely different from the one introduced in the House. This is likely to lead to several rounds of negotiations which in turn would raise market volatility.
Central Banks Prepare to Wind down Stimulus
An end to the monetary stimulus packages which central banks across the world have put in place is another factor which will soon come into play. Markets have been boosted by an extended phase of soft interest rates over several years now and their gradual removal can only reduce the level of impetus they enjoy. While the Fed prepares to raise rates in December, the ECB will begin slashing the level of its bond purchases from this month.
One section of market watchers believe that U.S. investors have already come to terms with such a move. But given the events of the past week, a rate hike at this time could make things tougher for stocks. The Fed and the ECB are only likely to tighten monetary conditions further going ahead, which makes it imperative for investors to choose their stocks carefully.
U.S. Valuations Already at Record Level
Over the last few months, investors have received several warnings about the pricey nature of U.S. stocks. The latest of these comes from John Hussman who claims that valuations for U.S. stocks have already hit an all-time high. Using his valuation metric of choice, the ratio of market capitalization to gross value added, Grossman claims that stocks are pricier than they were in 2000 and 1929, years which heralded unprecedented market downturns.
Hussman believes that overstretched valuations, caused by an almost 300% Bull Run, will lead to a market drop of almost 63%. This would then lead to an entire decade of losses for the bourses. The underlying reason for the crash would be the prevailing belief among investors that only risky assets can provide good returns.
Such a feeling has become popular during an extended period of extremely low interest rates, thinks Hussman. While most market watchers would characterize such dire conclusions as a tad extreme, they would be hard put to dismiss them outright, given the events dampening investor sentiment in the recent past.
Concerns about the ability of the Trump administration to push through tax cuts have been weighing on stocks recently. Even though markets have edged up during the last trading session, such fears are likely to dampen investor sentiment going forward.
Further, central banks across the world are preparing to wind down monetary stimulus measures. Given such a backdrop it makes sense to bet on value stocks to protect your hard earned profits. Our selection is also backed by a good Zacks Value Score and Zacks Rank.
We narrowed down our choices with the help of our new Style Score system.
Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) offer the best investment opportunities in the value investing space. You can see the complete list of today's Zacks #1 Rank stocks here.
American Axle & Manufacturing Holdings, Inc. (AXL - Free Report) is a leading supplier of driveline and drivetrain systems, modules and components for the light vehicle market.
American Axle has a Value Style Score of A. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 4.98, lower than the industry average of 13.66. The stock has a price to earnings growth ratio (PEG) of 0.62, lower than the industry average of 1.45.
Vishay Intertechnology, Inc. (VSH - Free Report) is a leading international manufacturer and supplier of discrete passive electronic components and discrete active electronic components, particularly resistors, capacitors, inductors, diodes and transistors.
Vishay Intertechnology has a Value Style Score of A. The stock has a P/E (F1) of 15.32x, lower than the industry average of 17.75. It has a PEG ratio of 0.74, lower than the industry average of 0.96.
SMART Global Holdings, Inc. (SGH - Free Report) is a designer, manufacturer and supplier of electronic subsystems to OEMs.
SMART Global Holdings has a Value Style Score of A. The stock has a P/E (F1) of 9.87x, lower than the industry average of 21.67. It has a PEG ratio of 0.66, lower than the industry average of 1.62.
United Rentals, Inc. (URI - Free Report) is the largest equipment rental company in the world, with an integrated network of 880+ rental locations in 49 states and 10 Canadian provinces.
United Rentals has a Value Style Score of B. The stock has a P/E (F1) of 13.95x, lower than the industry average of 19.62. It has a PEG ratio of 0.89, lower than the industry average of 1.58.
Lam Research Corp. (LRCX - Free Report) supplies wafer fabrication equipment and services to the semiconductor industry.
Lam Research has a Value Style Score of B. The stock has a P/E (F1) of 14.36x, lower than the industry average of 15.08. It has a PEG ratio of 0.97, lower than the industry average of 1.10.
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