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Ignore Trade War, Focus on U.S. Economy: 5 Top Picks

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Early on Aug 8, China fired the latest salvo in the long-running U.S.-China trade war. The People’s Bank of China set the yuan’s daily reference rate at 7.0039 against one U.S. dollar. This is the lowest level experienced since Apr 21, 2008. When the yuan breached the psychological level of 7 per dollar on Aug 5, the Treasury department was quick to call China a currency manipulator.

Meanwhile, U.S. markets suffered a volatile day of trading on Aug 7, indicating that Wall Street’s mood was being dictated by the yuan. But economists and experts alike feel that equity markets should focus on America’s strong fundamentals instead of being swayed by external pressures.

Despite the slowdown in progress, the U.S. economy remains robust, mostly because of strong consumer spending, which contributes the largest share of GDP. This is why it makes sense to invest in select consumer discretionary stocks at this time.

Services Gauges Strong, Expansion Continuing

Earlier this week, key services gauges showed that the U.S. economy continues to expand, though the pace of growth was slowing. The Institute of Supply Management’s (ISM) services index declined from 55.1 in June to 53.7 in July, but remained robust enough. Meanwhile, IHS Markit’s services gauge exceeded estimates to hit a level of 53 for the same period.

These readings are seen as a reliable indicator of America’s economic health since services contribute nearly 85% of total GDP growth. The respondents of the ISM survey remained concerned about the likely fallout of the trade war. But the economy is continuing to expand. A slowdown is in the works, but respondents feel “clients are not balking” at the price rises caused by tariffs.  

Economic Indicators Robust, Recession Unlikely

Earlier this month, the Department of Labor released nonfarm payroll numbers for July. The U.S. economy added 164,000 jobs last month, marginally lower than the estimated level of 165,000. In fact, job growth has continued for 106 straight months, the longest winning streak on record.

Further, unemployment remains at a 50-year low of 3.7%. In fact, the figure has remained at 4% or lower for 16 straight months, the longest period in 50 years. There is enough evidence to indicate that wages are increasing at their fastest ever pace for historically lower-paying industries. This is largely an outcome of state-level hikes in minimum wage and persistently low unemployment.

And this is probably why economists feel that though a slowdown is underway, a near-term recession is highly unlikely. According to the latest Commerce Department figures, U.S. GDP hit a pace of 2.1% in the second quarter, lower than the rate of 3.1% witnessed in the first quarter. However, this was still largely above expectations and fueled by a robust increase in consumer spending.

Our Choices

The volatile session witnessed on Aug 7 is likely a symptom of the panic created by China’s currency-led retaliatory measures. At this time, investors would be advised to ignore ongoing trade tensions and focus on robust domestic economic fundamentals. Most indicators show that though a slowdown is in progress, a near-term recession seems highly unlikely.

Investing in consumer discretionary stocks, the powerhouse of the U.S. economy, remains prudent at this time. However, picking winning stocks may 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.

Crocs, Inc. (CROX - Free Report) is a designer, developer, distributor, marketer and distributor of casual footwear and accessories for men, women and children.

Crocs has a Zacks Rank #1 (Strong Buy) and VGM Score of A. The company’s expected earnings growth for the current year is 62.8%. The Zacks Consensus Estimate for the current year has improved by 12.5% over the past 30 days.

Penn National Gaming, Inc. (PENN - Free Report) is a leading, multi-jurisdictional owner and manager of gaming and racing facilities with video gaming terminal operations, and a focus on slot machine entertainment.

Penn National has a VGM Score of B. The company’s expected earnings growth for the current year is 69.7%. The Zacks Consensus Estimate for the current year has improved by 10.5% over the past 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Whirlpool Corporation (WHR - Free Report) is one of the largest manufacturers of home appliances in the world.

Whirlpool has a Zacks Rank #2 (Buy) and VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 3.2% over the past 30 days.

Comcast Corporation (CMCSA - Free Report) is a global media and technology company with three primary businesses: Comcast Cable, NBCUniversal and Sky.

Comcast has a Zacks Rank #2 and VGM Score of A. The company’s expected earnings growth for the current year is 20%. The Zacks Consensus Estimate for the current year has improved by 1.6% over the past 30 days.

Wyndham Destinations, Inc. (WYND - Free Report) is a vacation ownership and exchange company.         

Wyndham Destinations has a Zacks Rank #2 and VGM Score of B. The company’s expected earnings growth for the current year is 17.8%. The Zacks Consensus Estimate for the current year has improved by 2.5% over the past 30 days.

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