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Wall Street Mayhem to Persist in November: 5 Defensive Picks

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Wall Street has endured a difficult October, its worst monthly performance this year. Notably, all three major stock indexes suffered losses over the month. The Dow fell 5.1%, its biggest monthly drop since January 2016. The S&P 500 slumped 6.9%, its biggest monthly decline since September 2011. Meanwhile, Nasdaq Composite plummeted 9.2%, marking its largest monthly slide since November 2008.

The situation is likely to intensify in the near term with mid-term Congressional elections less than a week away and the Federal Reserve signaling one more rate hike this year. Lingering trade conflicts with China and concerns regarding the longevity of earnings momentum may result in more volatile trading in Wall Street going forward. At this juncture, it would be prudent to pick defensive stocks with a favorable Zacks Rank to cushion the portfolio.

US-China Trade War Intensifies

On Oct 29, Bloomberg reported that United States is preparing to impose tariffs on all residual imports from China in early December, if trade related negotiations between President Trump and Chinese president Xi Jinping fail to resolve trade conflicts. The latest round of tariffs could be worth $257 billion. Notably, the Trump administration has already imposed $250 billion tariffs on Chinese goods while China levied $110 billion of retaliatory tariffs on U.S. imports.  

On Oct 8, the IMF projected that global growth rate will be 3.7% for both 2018 and 2019, a decline of 0.2% from its earlier projection given in July due to the trade conflicts between the United States and China.

Concerns Regarding Fed’s Monetary Policy

The Federal Reserve has already increased benchmark interest rate three times in 2018. Each time the rate was increased by a quarter percentage points. Despite this, in October, Fed chair Jerome Powell announced interest rates have a long way to go before hitting neutral, a clear indication of further rate hikes. Higher interest rate will raise the cost of funds of investing in risky assets like equities. Instead investors may be better off investing money in risk-free government securities.

Will Earnings Momentum Continue?

As of Oct 31, 313 of the S&P 500 members have reported third-quarter earnings. For these companies, total earnings are up 22.7% year over year on 8.4% higher revenues. Despite strong showing, third-quarter growth momentum has slowed down from the first half of 2018.  For full-year 2018, total earnings for the S&P 500 are expected to be up 21% on 6.7% higher revenues. For full-year 2019, total earnings are expected to be up 9.7% on 5.6% higher revenues.  This clearly indicates that earnings momentum is likely to decline going forward. (Read More: 3 Takeaways from the Q3 Earnings Season)

Our Picks

Stock markets are likely to remain volatile in near future due to trade concerns, geopolitical conflicts and may be some sector specific issues. Consequently, investment in defensive sectors such as utilities, telecom and consumer staples will be fruitful. We have narrowed down our search on five stocks with a Zacks Rank #1 (Strong Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below depicts price performance of our five picks in the last three months.

Archer-Daniels-Midland Co. (ADM - Free Report) procures, transports, stores, processes, and merchandises agricultural commodities and products. The company has expected earnings growth of 41.6% for current year. The Zacks Consensus Estimate for the current year has improved by 0.9% over the last 60 days.

The Chefs' Warehouse Inc. (CHEF - Free Report) serves the specific needs of chefs who own and/or operate restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools and specialty food stores. The company has expected earnings growth of 77.3% for current year. The Zacks Consensus Estimate for the current year has improved by 1.3% over the last 60 days.

Viavi Solutions Inc. (VIAV - Free Report) provides network test, monitoring, and assurance solutions to communications service providers, enterprises, network equipment manufacturers, civil government, military and avionics customers worldwide. The company has expected earnings growth of 28.3% for the current year. The Zacks Consensus Estimate for the current year has improved 1.7% over the past 60 days.

Portland General Electric Co. (POR - Free Report) is a vertically integrated electric utility that serves residential, commercial and industrial customers in Oregon. The company has expected earnings growth of 2.6% for the current year. The Zacks Consensus Estimate for the current year has improved 0.4% over the past 60 days.

National Fuel Gas Co. (NFG - Free Report) is an integrated energy company with a complementary mix of natural gas assets located in the heart of the prolific Appalachian basin. The company has expected earnings growth of 2.4% for the current year. The Zacks Consensus Estimate for the current year has improved 4.5% over the past 60 days.

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