Lately, the stock market has been highly volatile due to trade war jitters. Uncertainties regarding the completion of a U.S.-China phase one trade deal and the fate of the 15% tariff imposition on Chinese products scheduled on Dec 15 has left investors rushing to hedge.
In fact, the fear gauge has climbed steeply, implying that investors are turning bearish. Given such conditions it is advisable to invest in defensive stocks.
VIX Jumps 16%, Encouraging Investors to Hedge
The CBOE Volatility Index (VIX) is a measure of the level of implied volatility based on the S&P 500 option prices. In short, VIX represents the market's expectation of the 30-day forward-looking volatility and a low VIX reading indicates investors’ bullishness.
Generally, the S&P 500 and VIX move in opposite directions 80% of the time. But both may proceed in the same direction in certain market conditions. In May, both indexes rose simultaneously for the first time for two straight weeks. This event was followed by a 7% slump in the S&P 500 the very next month.
On Nov 26, as the stock market rallied to hit record highs and the fear-gauge CBOE Volatility Index (VIX) dropped to a new low, declining 2.8% to close at 11.55. The fear gauge closed at the lowest since Oct 3, 2018. But, with rising uncertainties over the protracted U.S.-China trade war owing to a fresh 15% higher tariff on Chinese products scheduled to be imposed on Dec 15, VIX jumped 16% on Dec 9.
The market has been highly volatile with fears of “no deal” before Dec 15 creeping in and investors bearish. Despite this, that major benchmarks are merely 1% lower than their all-time highs and VIX remains well below its long-term average of 19. The steep jump of 16% highlights clouded investors’ sentiment.
Given the uncertainties looming from the U.S.-China trade deal, investors are looking for options to hedge. Defensive stocks look like safe options in such uncertain times.
Why Play Defensive?
Defensive stocks like utilities, consumer staples and healthcare have stable earnings regardless of market conditions. Amid any market gyration, demand for these products or services is constant, as these cater to basic necessities. However, these stocks do not give high returns when the economy is expanding, compared to technology and other sectors.
But with the prevailing trade war weighing heavily on manufacturing and in turn on the economy, defensive stocks are generating better-than-expected results. In fact, defective stocks that include utilities, consumer staples and real estate sectors have been quite beneficial in this turbulent market. In fact, the Real Estate Select Sector SPDR Fund (XLRE), the Utilities Select Sector SPDR Fund (XLU) and the Health Care Select Sector SPDR Fund (XLV) have grown 27.3%, 21.1% and 17%, respectively, on a year-to-date basis.
5 Stocks to Buy Now
Hence, as fear creeps in from uncertainties related to the trade deal completion and imposition of higher tariffs in mid-December, it is prudent to invest in defensive stocks. We have shortlisted five defensive stocks that flaunt a Zacks Rank #1 (Strong Buy).
Spark Energy, Inc. SPKE operates as an independent retail energy services company in the United States, providing electricity and natural gas to residential and commercial customers. The company’s expected earnings growth rate for the next quarter is more than 100% against the Zacks Utility - Electric Power industry’s projected earnings decline of 16.4%. The Zacks Consensus Estimate for the company’s current-year earnings has advanced more than 100% over the past 60 days. Spark Energy has outperformed the industry in the past year (+22.1% versus +7.5%).
Vertex Pharmaceuticals Incorporated VRTX engages in developing and commercializing therapies for treating cystic fibrosis. The company’s expected earnings growth rate for the next quarter is 17.5% against the Zacks Medical - Biomedical and Genetics industry’s projected earnings decline of 76.5%. The Zacks Consensus Estimate for the company’s current-year earnings has advanced 5% over the past 60 days. Vertex Pharmaceuticals has outperformed the industry in the past year (+26.3% versus -3.6%).
ResMed Inc. RMD develops, manufactures, distributes and markets medical devices and cloud-based software solutions that diagnose, treat and manage respiratory disorders. The company’s expected earnings growth rate for the current year is 12.6% compared with the Zacks Medical - Products industry’s projected earnings growth of 4.6%. The Zacks Consensus Estimate for the company’s current-year earnings has advanced 3.5% over the past 60 days. ResMed has outperformed the industry in the past year (+32.3% versus +8.8%).
Prologis, Inc. PLD leases modern logistics facilities to customers principally across two major categories: business-to-business and retail or online fulfillment. The company’s expected earnings growth rate for the current year is 9.2% against the Zacks REIT and Equity Trust - Other industry’s projected earnings decline of 1.6%. The Zacks Consensus Estimate for the company’s current-year earnings has advanced 1.2% over the past 60 days. Prologis has outperformed the industry in the past year (+38.5% versus +12.9%).
The Boston Beer Company, Inc. SAM produces and sells alcohol beverages primarily in the United States. The company’s expected earnings growth rate for the next quarter is 19.2% against the Zacks Beverages - Alcohol industry’s projected earnings decline of 89.2%. The Zacks Consensus Estimate for the company’s current-year earnings has advanced 1.9% over the past 60 days. The Boston Beer Company has outperformed the industry in the past year (+40.1% versus +11%).
