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U.S. Dollar Hits Highest Since December: 5 Domestic Picks

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The U.S. dollar is currently at its highest level since December 2018. U.S. dollar is gaining strength despite the threat of partial economic shutdown and trade war concerns. However, an impending slowdown of the global economy is strengthening the dollar.  

At this juncture, investors are seeking safe haven in U.S. dollar. However, U.S. products are losing competitiveness in the international market due to a strong currency. Consequently, it will be prudent to invest in domestic business-focused stocks with a favorable Zacks Rank.

US Dollar Index Hits Highest Since December

On Feb 11, the ICE U.S. Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, touched 97.084, its highest level since December 2018. Notably, the DXY rose 1.1% for the week ended Feb 10. This was the Dollar index’s highest percentage weekly gain since August 2018.

Tepid Economic Outlook of Eurozone

On Feb 6, the European Commission lowered 2019 growth projection for the 19-member Eurozone from 1.9% in November to 1.3%. The growth rate for 2020 was pegged at 1.6%. The EC cited weaker demand for its exports from China and geopolitical issues related to Brexit as the primary reasons behind lowering growth rate.

On Feb 7, the Federal Statistical Office of Germany reported that the country’s industrial output fell 0.4% in December, reflecting four consecutive months of decline. Year over year industrial output declined 3.9%. Moreover, Italy is on a collision with the European Union over fiscal discipline issues. Italy’s manufacturing sector shrank for a third straight month in December. IHS Markit’s gauge of factory activity came in at 49.2 for December.

Bank of England Reduces UK Outlook

On Feb 4, Bank of England reduced the growth rate of the UK for 2019 to 1.2% from 1.7% forecasted earlier. Economic forecast for 2020 is also reduced to 1.5%. The bank’s forecast implied that there is 25% chance that UK will fall into recession. The root cause of an impending slowdown is the Brexit related problem. Consumer confidence weakened significantly and business establishments have almost ceased capital spending owing to prolonged Brexit problem.

Concerns About China and Emerging Markets

On Feb 11, Financial Times reported that Chinese consumer spending growth over the lunar New Year 2019 came in at 8.5%, its slowest growth since 2005. On Jan 20, China announced that economic growth for 2018 was pegged at 6.6%, marking its slowest growth since 1990.  

Emerging markets are characterized as major borrowers of international debts (external commercial borrowing). Since the debts have to be repaid in dollar terms, servicing these debts while managing fiscal discipline becomes difficult for these countries.

Moreover, refinancing of debts, which are on the verge of maturity, becomes problematic owing to soaring interest costs. With the dollar continuing to surge, heavy debt servicing liabilities may lead to economic slowdown in emerging markets resulting in global economic slump.

Why Domestic Stocks?

Investors are concerned that a rising dollar will hurt sales of U.S. multinational companies as their products will be more expensive in the international markets. Domestic business oriented companies are mostly immune to any external shocks since the United States is the lone market for their products. This will help them to outperform the broader market defying extreme volatility.

Our Top Picks

At this juncture, investment in domestic business-focused stocks will be fruitful. We have narrowed down our search to five such stocks each having either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

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

Atlantic Capital Bancshares Inc. (ACBI - Free Report) provides commercial banking products and services in the United States. It has a Zacks Rank #1. The company has expected earnings growth rate of 26.9% for the current year. The Zacks Consensus Estimate for the current year has improved 4.6% over the past 60 days.

Middlefield Banc Corp. (MBCN - Free Report) provides various commercial banking services to small and medium-sized businesses, professionals, small business owners, and retail customers in northeastern and central Ohio. It has a Zacks Rank #1. The company has expected earnings growth rate of 10.7% for the current year. The Zacks Consensus Estimate for the current year has improved 4.2% over the past 60 days.

NRG Energy Inc. (NRG - Free Report) operates as an integrated power company in the United States. It has a Zacks Rank #2. The company has expected earnings growth rate of 64.2% for the current year. The Zacks Consensus Estimate for the current year has improved 8.1% over the past 60 days.

Pinnacle West Capital Corp. (PNW - Free Report) provides retail and wholesale electric services primarily in the state of Arizona. It has a Zacks Rank #2. The company has expected earnings growth rate of 8.1% for the current year. The Zacks Consensus Estimate for the current year has improved 0.2% over the past 60 days.

NexPoint Residential Trust Inc. (NXRT - Free Report) is focused on acquiring, owning and operating well-located middle-income multifamily properties primarily in the Southeastern and Southwestern United States. It has a Zacks Rank #2. The company has expected earnings growth rate of 16.7% for the current year. The Zacks Consensus Estimate for the current year has improved 1.4% over the past 60 days.

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