On May 21, U.S. stocks registered a revival after the Trump administration temporarily relaxed its restrictions on exports to Chinese telecom major Huawei. Thought the trade rhetoric remains intense, market participants viewed this move as an indication that the United States is moving toward a deal rather than away from one.
Multiple factors are pushing both the United States and China toward an agreement. A prolonged trade war could disrupt America’s economic momentum and a long-running market rally, hurting Trump’s reelection prospects. Tariffs could trigger inflation, which in turn could force the Fed to raise rates.
While the trade war could harm the U.S. economy, it may not spare China. This provides Beijing with enough incentive to seal an agreement. Under such circumstances, trade-war resistant stocks such as biotechs could ride a relief rally. This is why it makes sense to add them to your portfolio.
Trump Needs a Deal to be Reelected
Time and time again, the U.S. President has claimed credit for extending the record-breaking equity market rally. The truth is that his record requires closer scrutiny on all counts but this one. Of course, Trump can also claim that he has kept the Obama-era economic recovery alive.
A vibrant equity market and a strong economy are the prerequisites to Trump’s reelection hopes. This is why experts feel that market forces will ultimately force him to climb down from a seemingly non-negotiable stance and seal a deal.
Tariffs Likely to Boost Inflation, “Fed Put” May Disappear
One of the key features of the current economic recovery is the sluggish pace of inflation. This has reduced the prospect of rate hikes, lifting the spirits of equity market investors. But as the economy feels the impact of surging tariffs, the situation could change.
Contrary to what the Trump administration would like us to believe, American consumers would have to pay more in terms of higher prices. This would weigh on the sales of domestic companies even as input costs begin to rise.
An increase in the pace of inflation would also do away with the “Fed put,” the belief that the central bank would refrain from rate hikes, even cutting rates given the current economic scenario.
This factor is believed to be responsible for the recovery from last year’s equity market slump. But rising inflation could force the Fed to reconsider rate hikes once again, hurting equities in the process.
US, China Economies Could Take a Hit
Finally, a trade war could hurt both the economies currently slugging it out. Trade conflicts dampen business confidence since they hurt global growth, a fact that the captains of industry are painfully aware of. An equity market slide would hurt growth and business confidence even more.
Economic conditions in China are far graver. Its economy rebounded in the first quarter after a massive dose of stimulus. But exports make up 18% of China’s GDP while they account for only 3.5% of U.S. GDP.
This is why an extended trade war could force China to administer stimulus measures once again, when it should be rolling back the measures it has just implemented.
The impact of a long-lasting trade war would be so bruising that a deal is likely to be struck sooner rather than later. This would trigger a relief rally of sorts which would first benefit stocks such as those from the biotech sector.
These stocks have suffered during the trade conflict. But this is primarily because they carry high beta. In reality, they have little to fear from a trade war, which makes them excellent choices at this point. However, picking winning stocks may prove to be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score of B.
Cambrex Corporation (CBM - Free Report) is a provider of services and products for the commercialization and development of therapeutics across the world.
Cambrex has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the current year has improved by 12.3% over the past 30 days.
Innoviva, Inc. (INVA - Free Report) is focused on the development, commercialization and financial management of bio-pharmaceuticals.
Innoviva’s Zacks Consensus Estimate for the current year has improved by 11% over the past 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Celgene Corporation (CELG - Free Report) is a biopharmaceutical company focused on the discovery, development and commercialization of drugs targeting cancer and inflammatory diseases.
Celgene has a Zacks Rank #2 (Buy). The company has expected earnings growth of 21% for the current year.
BioDelivery Sciences International, Inc. (BDSI - Free Report) is a specialty pharmaceutical company focused on the development and commercialization of treatments in the areas of pain management and drug addiction.
BioDelivery Sciences has a Zacks Rank #2. The company has expected earnings growth of 80.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 38.9% over the past 30 days.
Unity Biotechnology, Inc. (UBX - Free Report) develops therapeutics which prevents, halts and reverses various diseases.
Unity Biotechnology has a Zacks Rank #2. The company has expected earnings growth of 25% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.1% over the past 30 days.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>