As the year 2019 is close to wrapping up, the construction sector looks fairly strong buoyed by Fed’s rate cuts, solid public sector outlays and positive economic data despite the lingering U.S.-China trade spat, affordability concerns, global market slowdown and shortage of skilled labor. Optimism surrounding the construction sector grew manifold post the preliminary U.S.-China trade truce over import duties. Year to date, the construction sector has surged 38%, outperforming the broader market’s (S&P 500) rally of 26%.
Ramped-up infrastructure and residential construction spending remains a strong driver, beating market expectations on major data points. The economy has been gaining from a pickup in government expenditures, as government outlays are expected to be the strongest this year in a decade. During the first 10 months of 2019, public spending increased a decent 6.3%, led by notable gains in non-residential spending like commercial, power and transportation. Meanwhile, higher exports and residential investment has helped boost the economy to 2.1% from the initial estimate of 1.9% for the third quarter.
The New Year 2020 also looks like a good one for construction, courtesy of resilient economy, rising wage growth, low unemployment levels and easing trade tensions.
More Breathing Room on Tariffs
The United States and China recently reached a preliminary agreement. As part of the Phase 1 deal, the United States canceled plans to impose new tariffs on $160 billion worth of Chinese imports and both the parties agreed to many structural changes and massive purchases of agricultural product, energy, and manufactured goods, plus much more. This will de-escalate the trade war that had for long been building pressure on construction companies’ margins.
Although the United States has apparently maintained 25% tariffs on approximately $250 billion of Chinese imports, Trump had assured through a tweet that phase two negotiations would start immediately. Per the media reports, the preliminary deal should serve as a stepping stone for a more comprehensive accord, which would be signed by Trump and Chinese President Xi Jinping.
Residential Rebound & Solid Job Growth
The housing market, especially single-family, has regained momentum, beating market expectations on major data points. Lower mortgage rates on account of Fed’s dovish stance and a solid labor market have been largely driving the recent resurgence in the housing market, which hasn’t contributed to economic growth since the end of 2017.
Notably, the Freddie Mac’s Multifamily Apartment Investment Market Index or AIMI grew 5.5% in third-quarter 2019 as mortgage rates declined the maximum in a quarter (39 basis points) in five years. On an annual basis, AIMI continued to experience growth and rose 9.6% after growing 4.3% last quarter. Per the latest reading from Freddie Mac, the average U.S. fixed rate for a 30-year mortgage was steady at 3.73%. Although this rate is the same as last week’s percentage, it’s still more than a percentage point below the 4.55% of the year-earlier week. The most important factor fueling the construction rally is the three interest rate cuts by the Federal Reserve in 2019.
Although headwinds like slower global and domestic growth are expected to weigh on the market in 2020, the U.S. economy appears to be in a sweet spot with a solid increase in residential construction, improvement in industrial output in nation’s factories and a rise in job openings. America added 266,000 jobs in November, marking the highest number of monthly job addition in the domestic market since January. The unemployment rate slipped to 3.5% from October’s 3.6%, back to the 2019 low and matching the lowest jobless rate since 1969.
Investing in the Construction sector seems profitable right now, as it falls within the top 50% (eight out of 16 sectors) of the Zacks Sector Rank.
Here are five construction stocks that returned more than double of the S&P 500 YTD and will continue to outperform in the coming months as gauged by potentially superior weighting methodologies and a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Along with a solid rank, a VGM Score of B or better is quite a combination to look out for in stocks, especially for investors beefing up their portfolio amid precarious market conditions. A few of such construction stocks with encouraging prospects are TopBuild Corp. (BLD - Free Report) , Foundation Building Materials, Inc. (FBM - Free Report) , Forterra, Inc. (FRTA - Free Report) , Installed Building Products, Inc. (IBP - Free Report) , and Universal Forest Products, Inc. (UFPI - Free Report) .
Take a quick look at the best performers and their key metrics in the table below:
Zacks Top 10 Stocks for 2020
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