Things have been ugly for U.S. stocks for a while, mostly due to rise in benchmark bond yield that resulted in steeper borrowing costs for both corporates and individuals. But, we all know that it is momentary. Meanwhile, healthy economic conditions and upbeat expectations for quarterly earnings are likely to boost the stock market.
As the broader market is ready for a counter-trend bounce, it is the ideal time to bet on stocks that have the potential to grow in the near term.
Stock Market Carnage
Since Oct 9, the Dow plunged nearly 1,400 points or more than 5.2%. This has led to the Dow closing below its long-term moving average for the first time since July.
The broader stock market, in fact, seems to be on the verge of ending its record bull run. After all, the S&P 500 fell below its 200-day moving average for the first time on Oct 11 since Apr 2. Bespoke Investment Group further added that the S&P 500 is currently about 5% shy of correction territory and 15.4% short of a bear market, which is primarily defined as a drop of 20% from a recent high.
The tech-laden Nasdaq had already fallen below its 200-day moving average on Oct 10, while the Russell 2000 index of small-caps ended in the correction territory in the last trading session. Needless to say, that the CBOE Volatility Index (VIX) continues to hover above the 20 mark, indicating a bearish outlook for the equity market.
What Led to the Selloff?
Rapidly climbing benchmark bond yield has fueled fears that the profit margins of U.S. corporates will get squeezed by steeper borrowing costs. This escalating cost of borrowing already had a negative impact on mega-capitalization companies like Facebook, Inc. (FB - Free Report) , Amazon.com, Inc. (AMZN - Free Report) , Netflix, Inc. (NFLX - Free Report) and Alphabet Inc. (GOOGL - Free Report) . Lest we forget, these players better known as FANG stocks do have an outsize impact on the broader market by dint of their market values.
At the same time, 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 Fed, by the way, 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.
President Trump has also partly blamed the Fed for headwinds in the market. He said that “I think the Fed is making a mistake. It’s so tight, I think the Fed has gone crazy.” After all, the equity market did enjoy a bull run for a prolonged period of time mostly due to ultra-low yields.
Why Should You be Buying in This Stock Market Pullback?
Even though investors may be in doubt following the recent meltdown, they shouldn’t completely shun the stock market. In the words of investing guru Warren Buffett, “be fearful when others are greedy and greedy only when others are fearful.”
If you aren’t game for risks, robust economic growth and upbeat corporate earnings are factors that should perk you up.
Most of the components of the Conference Board’s Leading Economic Index has already indicated a 3% or more growth rate in GDP in the final two quarters of the year and is on track to hit the Trump administration’s annual growth target of 3%. If that happens, it would be the best yearly performance since 2005, two years before the Great Recession. And when it comes to corporate earnings, Q3 is expected to be in double-digits for the sixth time in the last seven quarters (read more: Wall Street Gears Up for Blockbuster Q3 Earnings: 5 Picks).
Buy These 5 Solid Stocks Now
Given the aforesaid positives, the bull run isn’t over. And with Wall Street all set to dispel the recent meltdown, investing in fundamentally sound stocks that are poised to gain in the near future seems judicious. Moreover, by purchasing stocks right after a dip, investors are essentially buying shares at a discounted price.
We have, thus, selected five such stocks that flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Advance Auto Parts, Inc. (AAP - Free Report) provides automotive replacement parts, batteries, accessories, and maintenance items. The Zacks Consensus Estimate for earnings rose 2.4% in the last 60 days period. Despite falling 5.8% in the last three trading days, the company’s expected earnings growth rate for the current year is 29.6% compared with the Automotive - Retail and Wholesale - Parts industry’s expected growth of 19.7%.
Atlas Air Worldwide Holdings, Inc. (AAWW - Free Report) provides outsourced aircraft and aviation operating services. The Zacks Consensus Estimate for earnings rose 1.9% in the last 60 days. In spite of losing 11.2% in the last three trading sessions, the company’s expected earnings growth rate for the current year is 39.4% compared with the Transportation - Air Freight and Cargo industry’s expected growth of 21.9%.
ABIOMED, Inc. (ABMD - Free Report) engages in the research, development, and sale of medical devices. The Zacks Consensus Estimate for earnings soared 30.4% in the last 90 days. Despite falling 9.4% in the last three trading days, the company’s expected earnings growth rate for the current year is 88.9% compared with the Medical - Instruments industry’s estimated growth of 16.8%.
Archer-Daniels-Midland Company (ADM - Free Report) procures, transports, stores, processes, and merchandises agricultural commodities. The Zacks Consensus Estimate for earnings rose 4.6% in the last 60 days. In spite of declining 5.9% in the last three trading sessions, the company’s expected earnings growth rate for the current year is 41.2% compared with the Agriculture - Operations industry’s expected growth of 35.2%.
Amerisafe, Inc. (AMSF - Free Report) is an insurance holding company. The Zacks Consensus Estimate for earnings rose 0.6% in the last 60 days. Despite losing 0.9% in the last three trading days, the company’s expected earnings growth rate for the current year is 9.4% compared with the Insurance - Accident and Health industry’s projected growth of 7.7%.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>