Wall Street has witnessed a sharp decline in the second half of 2018 as a result of intensifying market turmoil. The broad-based market decline can be attributed to lingering tariff related conflicts with China, plummeting crude oil prices, several geopolitical problems and yield curve inversion of sovereign bonds.
The negative sentiment has dented investor confidence to such an extent that strong consumer spending and labor market data have failed to instill optimism. At this juncture, it will be prudent to invest in stocks from defensive industries like consumer staples with a favorable Zacks Rank and strong growth potential.
Wall Street Remains Lackluster in 2018
U.S. stocks have had a rough run so far in 2018 after providing fabulous returns in 2017. Out of three major stock market indexes, the Dow 30 and S&P 500 are currently in the negative territory with a decline of 0.5% and 0.9%, respectively, year to date. Only the Nasdaq Composite has gained 2.4% so far in 2018.
However, in the second half of 2018, the performances of these three indexes have been more disappointing. The Dow 30, S&P 500 and Nasdaq Composite declined 2.3%, 4.7% and 8.9%, respectively, erasing the gains of the first half of 2018.
US-China Trade War Yet to Resolve
An amicable solution to the trade related conflict between the United States-China following the Dec 1 meeting between President Trump and his Chinese counterpart Xi Jinping is yet to come by.
However, confusion has increased around China’s intentions of taking adequate measures to stop technology theft from the United States. Uncertainty also persists about the extent to which it will open up markets to U.S. companies and provide concessions to reduce trade imbalance between the two countries. Moreover, on Dec 9, U.S. Trade Representative Robert Lighthizer said that he considers Mar 1 "a hard deadline" to reach a deal with China, failing which, the tariff war is likely to go on.
Why Consumer Staples Stocks?
The consumer staples sector includes companies that provide necessities and products used in daily lives, which make them defensive in nature. With the companies providing necessary products, the consumer staples industry has always been the go-to place for investors who want to play it safe during extreme market fluctuations.
Consequently, adding stocks from the consumer staples basket usually lends more stability to portfolios in an uncertain market condition. Moreover, the sector remains a lucrative space for income-seeking investors given its strong dividend yield.
In the third quarter of 2018, all consumer staple companies within the S&P 500 index reported results with 8.9% year-over-year earnings growth on 0.9% revenue growth. Notably, in the past six months S&P 500’s Consumer Staple Select Sector SPDR (XLP) has gained 8.3%, trailing only Utilities Select Sector SPDR’s (XLU) gain of 16.1%.
Our Top Picks
Stock markets are likely to remain volatile in the near future due to trade concerns, geopolitical conflicts and interest rate movements. Consequently, investment in defensive sectors such as consumer staples will be fruitful.
The chart below shows price performance of our five picks year to date.
Archer-Daniels-Midland Co. procures, transports, stores, processes, and merchandises agricultural commodities and products. The company has expected earnings growth rate of 46.5% for the current year. The Zacks Consensus Estimate for the current year has improved 3.8% over the past 60 days.
Monster Beverage Corp. develops, markets, sells, and distributes energy drink beverages, soda, and its concentrates in the United States and internationally. The company has expected earnings growth rate of 21.2% for the current year. The Zacks Consensus Estimate for the current year has improved 2.3% over the past 60 days.
Blue Apron Holdings Inc. provides recipes and fresh ingredients for making home cooking accessible. The company has expected earnings growth rate of 58.5% for the current year. The Zacks Consensus Estimate for the current year has improved 5.6% over the past 60 days.
Calyxt Inc. a consumer-centric food- and agriculture-focused company, develops healthier specialty food ingredients and food crops using gene-editing technology for plants in the United States. The company has expected earnings growth rate of 17% for the current year. The Zacks Consensus Estimate for the current year has improved 7.9% over the past 60 days.
Ollie's Bargain Outlet Holdings Inc. offers food products, housewares, books and stationery, bed and bath products, floor coverings, electronics, and toys, and other products. The company has expected earnings growth rate of 41.6% for the current year. The Zacks Consensus Estimate for the current year has improved 0.6% over the past 60 days.