Fed interest-rate decision days generally tend to be volatile for the stock market. With the Fed almost certain to hike rates on Sep 26, investors may expect to see periodic bouts of volatility. In fact, Fed rate hike days have seen the markets start in the green and then lose momentum into the afternoon.
Against such a distressing backdrop, investing in stocks that provide excellent risk-adjusted returns seems judicious.
Fed Interest-Rate Decision Days Tend to be Volatile
Fed Chairman Jerome Powell will hold a press conference on Sep 26 following the central bank’s monetary policy decision. And this means investors have to brace for sudden, unwarranted market volatility. After all, stocks on average have fallen 0.13% in the last 10 times the Fed held its monetary policy meetings, according to data published by Bespoke Investment Group.
Going by the trend, the Dow and the S&P 500 did close in the red during the first day of the meeting, Sep 25. Adding to the potential trouble, head of U.S. rates strategy at Nomura, George Goncalves said that the Fed rarely hiked rates in September, a month in which the equity market historically hasn’t performed well. Needless to say that the policy makers are widely expected to raise benchmark short-term federal funds rate by a quarter percentage point to a range between 2% and 2.25%, which will be the highest since 2008. In fact, traders expect a 100% chance of a rate hike in the policy meeting, per CME’s FedWatch (read more: Fed Set to Raise Rates Again: Top 5 Winners).
Justin Walters, strategist and co-founder of Bespoke, in a note to clients said that the S&P 500 in particular has gained 0.25% on the day the Fed tightens monetary policy since 1994, while it gets an extra lift when the Fed trims rates, up 0.44%.
But such relative strength of the S&P 500 has been put in doubt recently as the broader index finished in the negative territory the last three times the Fed hiked rates. There is also a certain pattern that unfolds during the Fed rate hike day. The S&P 500 starts off on a positive note but tends to lose steam in the afternoon.
Walter said “after a drift lower from noon to 1:30 p.m. Eastern, we’ve seen the S&P catch a bid into the 2 p.m. rate announcement. From 2 p.m. to the close, however, we’ve seen the equity market sell off pretty sharply to take the index into the red by 20 plus basis points by the close of trading.”
Beyond Fed day, stocks also tend to fall in the first month following a rate hike, with the broader S&P 500 declining on average 0.41%.
Fasten Your Seat Belts: October is Approaching
October, by the way, is just around the corner. This means that investors should prepare for a topsy-turvy market ride. Traditionally, October has experienced well-above-average gyration. For instance, the standard deviation of the Dow’s daily changes has been 1.44% for all Octobers since 1896, much more than 1.05% for all months other than October.
But if you believe that the Dow’s fluctuation is mostly because of the 1987 crash or 2008 financial crisis, you are wrong. Even if these two years are eliminated, the standard deviation of daily Dow changes is still higher in October compared to other months.
Invest in These 5 Solid Stocks Now
Given such uncertainty, investors should invest in fundamentally sound stocks to safeguard their portfolio. We have, thus, selected five such stocks that flaunt a Zacks Rank #1 (Strong Buy). Such stocks also boast a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Further, these stocks are dividend payers. Dividend paying stocks have immense financial strength and are resistant to market vagaries. Such stocks reflect solid financial structure, healthy underlying fundamentals and better quality business. At the same time, these stocks are inherently less volatile than the markets they trade in, as they have low-beta. In this case, a low beta ranges from 0 to 1.
Guess', Inc. (GES - Free Report) designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children. The stock currently has a VGM Score of A and a beta of 0.13. The company has a dividend yield of 4%, while its five-year average dividend yield is 4.8%.
The stock’s expected earnings growth for the current year is 48.6%, more than the Textile - Apparel industry’s rally of 16.7%. In the last 60 days, three earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has increased almost 3% in the same period.
Alliance Resource Partners, L.P. (ARLP - Free Report) produces and markets coal, primarily for utilities and industrial users in the United States. The stock currently has a VGM Score of B and a beta of 0.78. The company has a dividend yield of 10.3%, while its five-year average dividend yield is 9.4%.
The stock’s expected earnings growth for the current year is 16%, more than the Coal industry’s increase of 1.1%. In the last 60 days, three earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings has jumped 8.5% in the same period.
DSW Inc. (DSW - Free Report) operates as a branded footwear and accessories retailer in the United States. The stock currently has a VGM Score of A and a beta of 0.87. The company has a dividend yield of 3.1%, while its five-year average dividend yield is 3%.
The stock’s expected earnings growth for the current year is 14.5%, more than the Retail - Apparel and Shoes industry’s rise of 12.9%. In the last 60 days, five earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has climbed 8.1% in the same period. You can see the complete list of today’s Zacks #1 Rank stocks here.
Luxfer Holdings PLC (LXFR - Free Report) is a materials technology company. The stock currently has a VGM Score of A and a beta of 0.88. The company has a dividend yield of 1.1%, while its five-year average dividend yield is 3.1%.
The stock’s expected earnings growth for the current year is 42.2%, more than the Manufacturing - General Industrial industry’s rise of 23%. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 12.4% in the same period.
Rocky Brands, Inc. (RCKY - Free Report) designs, manufactures, and markets footwear and apparel under the Rocky, Georgia Boot, Durango, Lehigh, and Michelin brand names in the United States, Canada, and internationally. The stock currently has a VGM Score of B and a beta of 0.17. The company has a dividend yield of 1.7%, while its five-year average dividend yield is almost 3%.
The stock’s expected earnings growth for the current year is 46.6%, more than the Shoes and Retail Apparel industry’s growth of 15.1%. In the last 60 days, one earnings estimate moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings has increased 3.3% in the same period.
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