The stock market freefall continues in October, as investors remain worried about interest rates rising from historic low levels. The recent rise in benchmark bond yield has marred the appeal of stocks, especially with valuations near historically high levels.
With the markets witnessing a pullback, investing in stocks that provide excellent risk-adjusted returns seems judicious.
It Has Been an Ugly Stretch for Wall Street
The Dow Jones Industrial Average tumbled 31.83 points, or 3.2%, to 25,598.74 on Oct 10, registering its worst one-day drop since February.
The S&P 500 also lost 94.66 points, or 3.3%, to 2,785.68. The S&P 500, thus, fell for five straight trading sessions, the longest losing streak since November 2016. The broader index fell below its 50-day and 100-day moving averages, and was mostly dragged down by the technology sector, which slipped 4.8%, the steepest drop since August 2011. In fact, the tech-laden Nasdaq witnessed its worst trading session in two years, declining 4.1%.
With U.S stocks off to volatile trading, the CBOE Volatility Index (VIX) leaped nearly 44% to 22.96 on Oct 10, the highest level since the beginning of April. Any reading above the 20 mark indicates a bearish outlook in the equity market.
What’s Behind the Stock Market Crash?
Continuous rise in bond yields rattled the equity market. After all, rapidly rising bond yields will result in steeper borrowing costs, which in turn will squeeze the profit margins of U.S. corporates.
The rate on fixed-rate mortgages goes up with a tick-up of the 10-year Treasury note. Thus, individuals looking to buy a home or condo will also be hurt, as the cost of financing the purchase will increase as rates go up. The 10-year Treasury note continues to be near the 3.19% mark, up from 2.94% a month ago and 2.40% at the end of last year.
The 10-year U.S. Treasury note, a benchmark for interest rates, soared on a slew of positive economic reports that reinforced expectations that the Fed will stick to its program of rising rates at a gradual pace. The labor market is in excellent shape, with unemployment rate at a 49-year low, while the economy is widely expected to grow around 3% in the final two quarters of the year.
The Fed has already raised its federal funds rate for three times this year and that typically spells short-term jitters for stocks, especially, now when the equity market is deemed lofty by some measures. Needless to say, the equity market enjoyed a bull run for a prolonged period of time mostly due to ultra-low yields.
October Has Been Bad for Markets
The equity market has traditionally been more volatile in October than any other month. 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 the other months, per Bespoke Investment Group.
And then there is the ‘October Effect’ theory which states that stocks mainly decline in October. After all, some of the worst market crashes happened this month.
According to the Stock Trader’s Almanac, there were mega “crashes in 1929 and 1987.” In fact, the great crash that occurred on Oct 19, 1987, saw the Dow plunge 22.6% in a single day, which is arguably the worst one-day decline ever. The other black days, of course, were “the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989, and the meltdown in 2008,” per the Almanac (read more: 5 Top Stocks to Break the 'October Effect' Jinx).
How to Prepare for the Bloodbath
Given the aforesaid factors, it seems like the Wall Street is facing a bloodbath. Taking this bearish sentiment into consideration, let’s take a look at which stocks are worth a bet. 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. At the same time, these stocks are defensive plays. Such stocks are generally non-cyclical or companies whose performance and sales are not highly correlated with activities in the broader market. Their products are in constant demand irrespective of market volatility and such names include companies from utility, healthcare and consumer staples sectors.
5 Solid Picks
We have, thus, selected five such stocks that boast a Zacks Rank #2 (Buy).
Ameren Corporation (AEE - Free Report) operates as a public utility holding company. The company has a beta of 0.2. The company has a dividend yield of 2.8%, while its five-year average dividend yield is 3.6%. The Zacks Consensus Estimate for its current-year earnings rose 1.2% in the last 60 days. The company is expected to return 14.8% this year, higher than the Utility - Electric Power industry’s estimated return of 8.6%.
Pattern Energy Group Inc. (PEGI - Free Report) is an independent power company. It has a beta of 0.97. The company has a dividend yield of 9.3%, while its five-year average dividend yield is 6.4%. The Zacks Consensus Estimate for its current-year earnings rose 0.7% in the last 60 days. The company is expected to return 694.7% this year, higher than the Utility - Electric Power industry’s estimated rise of 8.6%.
Algonquin Power & Utilities Corp. (AQN - Free Report) owns and operates a portfolio of regulated and non-regulated generation, distribution, and transmission utility assets. The company has a beta of 0.76. It has a dividend yield of 5.1%, while its five-year average dividend yield is 4.6%. The Zacks Consensus Estimate for its current-year earnings rose 3% in the last 60 days. The company is expected to return 17.2% this year, higher than the Utility - Electric Power industry’s estimated rise of 8.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Sysco Corporation (SYY - Free Report) markets and distributes a range of food and related products. It has a beta of 0.56. The company has a dividend yield of 2%, while its five-year average dividend yield is 2.7%. The Zacks Consensus Estimate for its current-year earnings rose 0.6% in the last 60 days. The company is expected to return 11.2% this year, higher than the Food - Miscellaneous industry’s projected rise of 5.5%.
Anthem, Inc. (ANTM - Free Report) operates as a health benefits company. The company has a beta of 0.92. It has a dividend yield of 1.1%, while its five-year average dividend yield is 1.6%. The Zacks Consensus Estimate for its current-year earnings rose 0.6% in the last 90 days. The company is expected to return 28.6% this year, higher than the Medical - HMOs industry’s estimated rise of 19.1%.
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