Wall Street should be rejoicing right now, with investors getting the much-wished-for corporate and income tax cuts. Moreover, the economy has been growing at a healthy annual pace of 3% for three straight quarters now. On the contrary, there is widespread panic in Wall Street, with all the major indices officially entering the correction territory that has extinguished the nearly nine-year bull run.
Rising treasury yields has diminished the appeal of stocks, especially with valuations hovering at historically high levels. Bond yields moved north on expectations of an interest rate hike, courtesy of a possible uptick in inflation on stronger wage growth.
Investors also pointed that stocks suffered a bloodbath from the unwinding of trades linked to bets on volatility staying low. Add to this the political worries emanating from issues related to a second government shutdown, and stocks are likely to continue their free fall.
Given the turbulence, investing in low beta defensive companies seems prudent. Such stocks provide risk-adjusted returns, consistent dividend and steady earnings regardless of the state of the equity market.
Bears Rip Stocks As the Market Enters Correction
Bears dominated the market on Feb 8, as it showed more signs of institutional selling. The broader S&P 500 slumped 100.66 points, or 3.8%, to 2,581, while the Dow Jones Industrial Average lost 1,032.89 points, or 4.2%, to close at 23,860.46, its second worst point decline in history. Both the indices are now officially into the correction territory, down more than 10% from the recent all-time high reached in January.
In fact, the equity market is witnessing its first genuine bout of gyration in years, with the Cboe Volatility Index (VIX), Wall Street’s so-called fear gauge registering its largest percentage jump in history. VIX rose 14.4% to close the day at 31.72. Any reading above the 20 mark indicates bearish outlook in the equity market, but a reading of greater than 30 shows a high level of investor fear.
Here’s What Usually Happens After a Correction
The equity market was on a confirmed uptrend until this week. Stocks were in such a free fall that on Feb 5, major indices undercut important support areas. All of them fell through their 50-day moving averages, including many leading stocks, Apple APPL for instance, undercutting its 200-day line.
The key indices are now “officially” into correction territory, with things getting worse. According to The Goldman Sachs Group, Inc. (GS - Free Report) , if this is a bull market correction then volatility is expected to persist for another four months. But, if the loss deepens into a bear market, or a drop of 20% from the recent all-time high, it could be 22 months of pain for investors.
Why Did the Stock Market Crash?
Continuous rise in bond yields rattled the equity market, resulting in a downturn. Investors pulled money out of stocks as an uptick in bond yields made equities less attractive by increasing their opportunity cost.
Record rise in wage growth sparked fears of inflation and led investors to believe that the Fed will hike rates more times than anticipated. Wages grew at the fastest pace in January in more than eight-and-a-half years. Average hourly wages increased 9 cents, or 0.3%, to $26.74. This helped the average year-on-year hourly earnings to rise to 2.9%, the highest since June 2009.
Wages grew at the fastest pace since the end of the last decade on a tighter labor market, tax cut policy and a rise in the minimum wage threshold in several states. Minimum wage has been raised in 18 states in January, which had a positive impact on 4.5 million workers, per the Economic Policy Institute.
How to Prepare for the Pullback
As the markets seem to be plagued with widespread uncertainty, including stretched valuations, defensive stocks seem to be the safest investment option. Such stocks are generally non-cyclical, or companies whose business performance and sales are not highly correlated with the activities in the larger market. Their products are in constant demand irrespective of market volatility and such names include companies from the utilities and consumer staples sectors.
Utilities are deemed defensive stocks as electricity, gas and water are essentials. Food, beverage and tobacco companies are true defensive plays as demand for such staple stocks remains unaltered during market gyrations.
5 Solid Choices
We have, thus, selected five solid stocks from the aforementioned defensive sectors that boast a Zacks Rank #2 (Buy). Further, only low-beta stocks from such defensive companies have been selected. After all, low-beta stocks are the ones that are less correlated to the index and tend to be less volatile. In this case, a low beta ranges from 0 to 1.
BT Group (BT - Free Report) provides communications services worldwide, including the United States. It has a beta of 0.97. The company has a dividend yield of 5.9%, while its five-year average dividend yield is 7.2%. The stock, which is part of the Diversified Communication Services industry, is expected to give a solid return of 11.5% and 3.2% in the current quarter and year, respectively.
National Fuel Gas Company (NFG - Free Report) operates as a diversified energy company. It has a beta of 0.88. The company has a dividend yield of 3.3%, while its five-year average dividend yield is 2.6%. The company, which is part of the Utility - Gas Distribution industry, is expected to give a steady return of 3.9% and 7.3% in the current and next quarter, respectively.
Kimberly-Clark (KMB - Free Report) , together with its subsidiaries, manufactures and markets personal care, consumer tissue, and professional products worldwide. It has a beta of 0.66. The company has a dividend yield of 3.5%, while its five-year average dividend yield is 4.4%. The company, which is part of the Consumer Products - Staples industry, is expected to give a steady return of 8.3% and 12% in the current quarter and year, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Altria Group (MO - Free Report) manufactures and sells cigarettes, smokeless products, and wine in the United States. It has a beta of 0.53. The company has a dividend yield of 2%, while its five-year average dividend yield is 11.3%. The company, which is part of the Tobacco industry, is expected to give a solid return of 28.8% and 16.9% in the current quarter and year, respectively.
The Estée Lauder Companies (EL - Free Report) manufactures and markets skin care, makeup, fragrance, and hair care products worldwide. It has a beta of 0.74. The company has a dividend yield of 1.1%, while its five-year average dividend yield is 46.2%. The stock, which is part of the Cosmetics industry, is expected to yield a solid return of 15.4% and 25.7% in the current quarter and year, respectively.
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