First, a sluggish economy and then the inversion in yield curve have left investors scrambling to find ways to save themselves in case a recession strikes. The inversion in the yield curve occurred thrice in a fortnight, on Aug 14, Aug 21 and Aug 22. In the past, the 2-to-10-year yield curve inversion has always been followed by recessions and investors cannot ignore the indicator.
Investors in the United States are troubled by sluggish GDP growth, Fed’s uncertainty of a future rate cut, unending U.S.-China trade war and yield curve inversion. Investors are looking for options to overcome stave off the omens pointing toward a recession.
Yield Inversion Leads to Recessionary Worries
The yield curve represents yield of fixed-interest securities plotted against the length of time they have to run to maturity. A yield curve inversion occurs when the short-term yield falls below the long-term yield.
This inversion is a sign that investors are taking a dim view of near-term economic prospects. In spite of the reinvestment rate risk, shorter-term securities seem to offer higher returns than longer-term securities during high market volatility.
On Aug 14, for the first time since 2005, the spread between the yield on the 10-year Treasury note and that of the 2-year note diminished and the latter’s yield went below the curve of the former. According to economists, an inversion in the yield curve has preceded recessions in the past 50 years.
The phenomenon has occurred thrice in a week’s time, first on Aug 14 and consecutively on Aug 21 and Aug 22. The spread between the benchmarks 10-year and 2-year Treasury notes closed at a positive 1.8 basis points on Aug 21. The market closed with the 10-year yield at 1.587% and the 2-year rate at 1.569%.
On Aug 22, though the inversion was brief, it shook up the market for a while. At 4:05 pm ET the yield curve was inverted with the 2-year Treasury yield at 1.614%, above the 10-year at 1.611%.
An impact from the first inversion could be seen on the banking stocks as it is difficult to make profit from lending money in this environment. Bank of America Corporation (BAC - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) and Citigroup Inc. (C - Free Report) shares fell 4.6%, 4.2% and 5.3%, respectively, on Aug 14.
World Wide Economic Slowdown
Both the United States and China have presented data that signals a global economic slowdown. United States’ second quarter GDP growth for 2019 rose 2.1% compared to 4.1% a year ago. Whereas, the second-quarter GDP growth in China slowed to 6.2% compared to 6.4% in the first quarter on a year-over-year basis. This is the lowest growth rate in the past three decades.
On Aug 14, official data from Chinese authorities showed that its industrial output growth slowed to 4.8% in July, which is the weakest growth in 17 years. On the other side of the globe, euro zone GDP grew by 0.2% quarter over quarter, marking a significant slowdown compared to the 0.4% growth in the first quarter, this year.
Additionally, on the same day, Germany reported a 0.1% fall in GDP quarter over quarter, pulling the annual growth rate down to 0.4% in the second quarter from 0.9% in the first. Germany narrowly avoided a recession last year but now seems to be clouded by a negative GDP print.
With the Fed characterizing the rate cut as a “mid-cycle adjustment” and not a part of “pre-set course” for more easing, investors seems worried. Moreover, the prevailing U.S.-China trade war is further dampening the economy. This is forcing investors to rush toward safe haven stocks.
Grab These 5 Stocks – Stay Safe
Prevailing signs of economic slowdown and an inversion in the yield curve make the market highly volatile. Utilities and consumer staples are a safe option as these enjoy constant demand even during a recession and will be stable in a bear market too.
We have narrowed our search based on companies’ that deal in utilities and consumer staples. These five stocks also flaunt a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Unitil Corporation (UTL - Free Report) is a publicly traded utility company that serves New Hampshire, MA, and Maine with electricity and natural gas. Unitil’s expected earnings growth for the current year is 4%. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the past 60 days.
American States Water Company (AWR - Free Report) is a publicly traded utility conglomerate. It provides water service to customers in Northern, Coastal and Southern California. The company also distributes electricity to customers in the Big Bear recreational area of California. AWR’s expected earnings growth rate for the current year is 18.6%. The Zacks Consensus Estimate for current-year earnings has improved 2.5% over the past 60 days.
Chesapeake Utilities Corporation (CPK - Free Report) is a publicly traded utility company engaged in natural gas distribution and transmission, propane distribution and marketing. The company’s expected earnings growth for the current year is 12.7%. The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the past 60 days.
The Procter & Gamble Company (PG - Free Report) is a publicly traded company that engages in the manufacture and sale of a range of branded consumer packaged goods. It focuses on Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care.
Procter & Gamble’s expected earnings growth for the current year is 7.1%. The Zacks Consensus Estimate for current-year earnings has improved 1.9% over the past 60 days.
General Mills, Inc. (GIS - Free Report) is a publicly traded manufacturer and marketer of branded consumer foods sold through retail stores. The company’s expected earnings growth for the current year is 4.7%. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the past 60 days.
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