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Markets Face Multiple Risks in September: 6 Defensive Picks

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U.S. markets ended August on a strong note with most indexes hovering around record levels. Additionally, major benchmarks provided positive returns over the last four months, barring a small fluctuation by the Dow in June. The economy remains robust and earnings results have remained consistently strong.

But storm clouds are brewing for investors as we enter the historically rocky month of September. Midterm elections could also raise volatility and impede the rise of stocks. Also, lingering trade disputes with Canada and China could heighten risks.

This is why it makes sense to invest in defensive stocks to protect hard-earned profits. These stocks offer slower but stable growth during periods of uncertainty. Since these also hold out the promise of higher-than-average yields, investing in defensive stocks looks like a prudent option at this point.  

Historically Weak Month, Midterm Elections Raise Volatility  

Data from the “Stock Trader's Almanac” shows that September has started on a positive note during 14 of the last 23 years. However, those gains evaporated quickly as fund managers engage in house cleaning ahead of the third quarter. This has led to consistent selloffs during the end of the month for several years now.

According to data from the almanac, September has been the weakest month for the Dow and the S&P 500 since 1950. On average, the Dow loses 0.7% during this month, while the S&P 500 declines 0.5%. The Nasdaq, which debuted in 1971, loses around 0.5% on average during this month.

Further, volatility increases substantially during years when there are midterm elections. According to the Almanac, the Nasdaq and the Dow have suffered an average loss of 0.8% and 1%, respectively, during September in midterm election years. However, the S&P 500 loses only 0.4% during such periods. 

Trade Disputes, Rate Hike Could Spoil Markets’ Party

Investor sentiment received a boost after the United States and Mexico concluded a replacement deal for the North Atlantic Trade Agreement (NAFTA). But other trade disputes could threaten market gains in September. Firstly, trade talks with Canada have remained inconclusive up to now. Trump has also tweeted that including Canada in an agreement is not a “political necessity.”

Meanwhile, by Thursday, Trump could also impose fresh tariffs on $200 billion of Chinese goods. This would only serve to escalate the lingering trade war with China. Also, the Fed is widely expected to hike rates this month. And the post meeting statement on Sep 26 and comments from the Fed Chair could hint at another rate increase in December.

Our Choices

Markets have had an incredible run of gains over the last four months. But they seem to be up against several obstacles in September. Historical trends and midterm elections could soon hurt investor profits. Trump’s protectionist policies and the upcoming rate increases could also spoil the markets’ party.

Investing in defensive stocks, which offer a safe and stable choice during periods of uncertainty, looks like a good option at this point. Further, they carry the promise of above-average dividend yields. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

NRG Yield, Inc. , along with its subsidiaries, owns and operates a diversified portfolio of contracted renewable and conventional generation, and thermal infrastructure assets in the United States.

NRG Yield has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 38.9% for the current year. The Zacks Consensus Estimate for the current year has improved 5.5% over the last 30 days. The stock has a dividend yield of 6.1%.

Archer Daniels Midland Company (ADM - Free Report) is one of the leading food processing companies in the world.

Archer Daniels Midland has expected earnings growth of 40.2% for the current year. The Zacks Consensus Estimate for the current year has improved 8.7% over the last 30 days. The stock has a dividend yield of 2.7%. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sutherland Asset Management Corporation is a commercial mortgage real estate investment trust (REIT).

Sutherland Asset Management has a Zacks Rank #2 (Buy). The company has expected earnings growth of 22.9% for the current year. The Zacks Consensus Estimate for the current year has improved 5.4% over the last 30 days. The stock has a dividend yield of 9.3%.

Columbia Property Trust, Inc. (CXP - Free Report) operates as a REIT. It focuses on the acquisition, development, ownership, leasing and operation of office properties in primary U.S. markets.

Columbia Property Trust has a Zacks Rank #2. The company’s expected earnings growth for the current year is 30.3%.The Zacks Consensus Estimate for the current year has improved 1.7% over the last 30 days. The stock has a dividend yield of 3.3%.

DTE Energy Company (DTE - Free Report) is a holding company with subsidiaries engaged in regulated and unregulated energy businesses.

DTE Energy has a Zacks Rank #2. The company has expected earnings growth of 10.1% for the current year. The Zacks Consensus Estimate for the current year has improved 6.8% over the last 60 days. The stock has a dividend yield of 3.2%.

Pinnacle Foods Inc. is a manufacturer, marketer and distributor of branded food products under multiple brand names, primarily in North America.

Pinnacle Foods has a Zacks Rank #2. The company has expected earnings growth of 13.9% for the current year. The Zacks Consensus Estimate for the current year has improved 0.1% over the last 30 days. The stock has a dividend yield of 2%.

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