Back to top

Wall Street Routs on Yield Curve Inversion: 5 Low-Beta Picks

Read MoreHide Full Article

Wall Street collapsed as yields on 2-Year US Treasury Note and 3-Year US Treasury Note surpassed the yield on 5-Year US Treasury Note on Dec 4. For many industry researchers, this trend in government bond market is an indication of an impending economic slowdown. Moreover, the gap between yields on 10-Year US Treasury Note and 2-Year US Treasury Note narrowed to a significant extent. In fact, an inversion of these two yields may trigger an economic recession.

Additionally, confusion surrounding the recent cease fire of trade war between the United States and China also dented investors’ confidence. At this juncture, it will be prudent to invest in in low-beta stocks with favorable Zacks Rank to keep one’s portfolio safe from day-to-day market fluctuations.   

Sovereign Bond Yield Inversion

On Dec 4, yields on 2-Year US Treasury Note (2.811%) and 3-Year US Treasury Note (2.808%) outpaced the yield on 5-Year US Treasury Note (2.79%). This indicates short-term interest rates are higher than long-term interest rates. This happens when market participants become more uncertain about future economic growth. For many industry experts, this is a clear signal of an impending economic slowdown.

Moreover, the yield on 10-Year Treasury Note closed at 2.921%, its lowest in three months and largest single-day decline since Oct 11. The benchmark government bond yield also fell below its 200-day moving average at 2.957%. This is an important psychological barrier indicating further decline in 10-Year US Treasury Note yield in the long-term.

Following these developments, the spread between the yields of 2-Year and 10-Year US Treasury Notes stood at 11 basis points, the narrowest gap in 11 years. A yield inversion between 2-Year and 10-Year government securities is generally considered as a sign that a recession is about to take place.

Additionally, yield on very long-term 10-Year US Treasury Note fell 10.2 basis points to 3.174%, its lowest level in more than 2-months and largest single-day fall since May 29.

Skepticism Over US-China Trade Truce

Investors have become skeptical regarding a permanent solution to eight-month trade conflict between the United States and China. On Dec 1, the U.S. President Donald Trump and his Chinese counterpart Xi Jinping reached an initial agreement per which the trade truce will be valid for next 90 days.

However, there was confusion regarding the starting date for the agreement. Trump’s economic adviser Larry Kudlow announced the clock will start from Jan 1, 2019. However, White House later issued a correction, saying that the starting date was Dec 1, 2018.

During the 90 day period, the two countries will try to solve bilateral trade conflicts regarding technology transfer, intellectual property and agriculture. However, market is wary of the amount of concession that China will allow to the United States. It is also apprehensive regarding the amount of trade imbalance reduction as a result of China’s concessions.

Finally, on Dec 4, President Donald Trump once again reminded China that tariff is still an important weapon for him. In a series of tweets, Trump said, “a deal between the two countries would get done if possible. “But if not possible remember ... I am a Tariff Man.”

Our Top Picks

At this stage, investment in low-beta stocks will be fruitful. The beta is equal to 1 which means that the stock is as volatile as the market. So, a stock is relatively more volatile if it has beta greater than 1 and less volatile if beta is less than 1. However, picking winning stocks can be a difficult task.

This is where our VGM Score comes in handy, which helps us to select winners. We narrowed down our search on five stocks. Each of these stock have a Zacks Rank #1 (Strong Buy) and a VGM Score A. 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 six months.

Mercury General Corp. (MCY - Free Report) is engaged primarily in writing all risk classifications of automobile insurance in a number of states, principally California. It has a beta of 0.21. It has expected earnings growth of 70.7% for current year. The Zacks Consensus Estimate for the current year has improved by 30.2% over the last 60 days.

Rent-A-Center Inc. (RCII - Free Report) leases household durable goods to customers on a rent-to-own basis in the United States. It has a beta of 0.62. It has expected earnings growth of 255.6% for current year. The Zacks Consensus Estimate for the current year has improved by 1.2% over the last 60 days.

Information Services Group Inc. (III - Free Report) operates as a technology research and advisory company in the Americas, Europe, and the Asia Pacific. It has a beta of 0.33. It has expected earnings growth of 40% for current year. The Zacks Consensus Estimate for the current year has improved by 10.5% over the last 60 days.

Shoe Carnival Inc. (SCVL - Free Report) operates as a leading family footwear retailer in the United States. It has a beta of 0.73. It has expected earnings growth of 59.7% for current year. The Zacks Consensus Estimate for the current year has improved by 10.2% over the last 60 days.

inTEST Corp. (INTT - Free Report) designs, manufactures, and markets thermal management products and semiconductor automated test equipment interface solutions worldwide. It has a beta of 0.75. It has expected earnings growth of 15.9% for current year. The Zacks Consensus Estimate for the current year has improved by 3% over the last 60 days.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>



More from Zacks Analyst Blog

You May Like

Published in