The U.S. stock market mostly see-saws during the pre-midterm election period and rallies once the uncertainty fades, say analysts at The Goldman Sachs Group, Inc. (GS - Free Report) . The scenario is not expected to be any different this time around. Investors should brace for increased turbulence as a divided government is highly expected this election.
The last several months, in fact, have seen extreme levels of volatility as investors remained concerned about more protectionist trade policies and spike in bond yields after prices of essential commodities continued to move north. Given such uncertainty, investing in stocks that provide excellent risk-adjusted returns seems judicious.
Brace for Months of Uncertainty
Investors should brace for neck-snapping volatility as midterm election approaches, per Goldman. The broader market has been on a roller-coaster ride for the past few months, thanks to trade and tax polic, along with geopolitical tensions. Controversies surrounding Special Counsel Robert Mueller’s probe into whether Trump colluded with Russia’s initiative to impede the 2016 presidential election have aggravated concerns.
Thus, corporate profits and economic reports might have been crucial factors for stocks but political developments have continued to determine the direction of the market.
In the last 11 midterm election years since 1974, the S&P 500 managed to eke out gains in April, but, mostly traded flat through September only to rally once political uncertainty waned, per Goldman. In fact, in those years, stock market volatility averaged 15% compared with the median of 12% in all years.
This year is likely to be the same. After all, Democrats are poised to regain control over the House of Representatives even though Republicans are expected to maintain an upper hand in the Senate, based on recent polls. Goldman forecasts that Democrats will have nearly a 70% chance of repossessing the House but there is less than 40% chance of regaining a majority in the Senate. Goldman added that such a divided government doesn’t bode well for investors.
Volatility Makes a Dramatic Comeback
Volatility has already seen several days with sharp moves so far this year. The Cboe Volatility Index (VIX), the so-called Wall Street’s fear index, has seen a jump of no less than 20% in at least six trading sessions this year, according to the WSJ Market Data Group.
The volatility index has experienced 19 sessions so far this year where it ended up at least 5%, the highest since 1994. In fact, volatility doubled on Feb 5 as inflation concerns dragged the broader market down.
Such earth-shattering volatility followed a relatively calm 2017. Last year, the stock market shrugged off political and economic uncertainty, and demonstrated almost nothing in the way of market pullbacks.
Bond Yields Spike, Equities Wobble
Spike in U.S. bond yields, by the way, have triggered market gyrations. The benchmark 10-year Treasury note hit its highest level since January 2014 at 2.97% in early European trade. The 10-year yield increased as treasuries came under pressure. Treasuries sold off as higher commodity prices diminish the value of a bond’s fixed interest payments. Rise in oil prices and business houses saying that the cost of steel and several other raw materials are increasing in the United States have induced inflation fears.
Rise in bond yields affected the buying appetite for stocks. Uptick in bond yields increased the opportunity cost of investing in equities and therefore equities became less alluring. Selling pressure on U.S. equity benchmarks intensified on Apr 20, with all three major bourses retracing into the negative territory.
5 Top Stocks to Counter Market Gyrations
Given the aforesaid factors, it seems like Wall Street is poised to face months of volatility with midterms just around the corner. Taking this into consideration, 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 are also dividend payers which boast immense financial strength and are immune to market vagaries. Such stocks reflect solid financial structure, healthy underlying fundamentals and better quality business. Further, they boast a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Aflac Incorporated (AFL - Free Report) , through its subsidiary American Family Life Assurance Company of Columbus, provides voluntary supplemental health and life insurance products. The company has a Zacks Rank #2 and a beta of 0.95. The stock has a dividend yield of 2.3%. The Zacks Consensus Estimate for its current-year earnings rose 3.2% in the last 60 days. The company is expected to return 14.7% this year, higher than the industry’s estimated return of 9.3%.
CenterPoint Energy, Inc. (CNP - Free Report) operates as a public utility holding company in the United States. The company has a Zacks Rank #1 and a beta of 0.49. The stock has a dividend yield of 4.2%. The Zacks Consensus Estimate for its current-year earnings increased 2.6% in the last 60 days. The company is expected to return 13.1% this year, higher than the industry’s projected return of 7.5%.
Guess', Inc. (GES - Free Report) designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children. The company has a Zacks Rank #1 and a beta of 0.35. The stock has a dividend yield of 4.1%. The Zacks Consensus Estimate for its current-year earnings rose 16.5% in the last 60 days. The company is expected to return 41.4% this year, higher than the industry’s estimated return of 12.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nordstrom, Inc. (JWN - Free Report) , a fashion retailer that provides apparel, shoes, cosmetics, and accessories for women, men, young adults, and children in the United States and Canada. The company has a Zacks Rank #2 and a beta of 0.83. The stock has a dividend yield of 3.2%. The Zacks Consensus Estimate for its current-year earnings rose 9.3% in the last 60 days. The company is expected to return 15.5% this year, compared with the industry’s estimated return of 14.1%.
Pfizer Inc. (PFE - Free Report) discovers, develops, manufactures, and sells healthcare products worldwide. The company has a Zacks Rank #2 and a beta of 0.9. The stock has a dividend yield of 3.7%. The Zacks Consensus Estimate for its current-year earnings rose 0.3% in the last 60 days. The company is expected to return 11.7% this year, better than the industry’s estimated return of 9.1%.
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