A key yield curve has inverted to its worst level since 2007, sending out a warning signal for the global economy. Lingering trade tensions have unnerved investors, pushing them toward government bonds and dragging the benchmark yield down.
Given the rising concerns about the health of the economy, investors should find refuge in slowdown-proof stocks that have a steady stream of customers, irrespective of market conditions.
U.S. Treasury Yield Curve Inverts
The benchmark 10-year Treasury yield is now at its lowest level against the 2-year Treasury note since 2007. Currently, the yield on the benchmark 10-year Treasury note is at 1.476%, 5 basis points lower than the 2-year note’s rate of 1.526%.
With the 10-year rate below the 2-year note, fixed income traders are expecting a slowdown in the near term. Lest we forget, the 2-year yield has always surpassed the 10-year note in every slowdown over the past 50 years. What’s more, the spread between the 10-year note and the 3-month Treasury bills has contracted to (52) basis points, the worst since March 2007.
So, what led to the inverted yield curve? Thanks to the ever-changing China-trade narrative, the stock market continues to gyrate, compelling investors to pull money out of equities and opt for safe-haven government bonds, eventually leading to decline in the 10-year Treasury yield. After all, bond yields tend to move opposite to prices.
U.S.-China trade war is showing no signs of cooling down. The trade tussle got intensified after President Trump urged American firms to start looking for an “alternative to China.” Trouble began after China announced plans of imposing tariffs of 5% and 10% on nearly $75 billion of U.S. products.
Beijing clarified that the move was due to the Trump administration’s intention to impose 10% tariffs on $300 billion of Chinese imports. Trump, in the meantime, reacted to China’s decision by saying that the United States will increase tariffs on $250 billion of Chinese goods to 30% from an earlier 25%. And tariffs on additional $300 billion imports from China would go up to 15% from 10%.
Some may argue that Trump has now said that China wants to return to the negotiating table. He, in fact, claimed receiving two “very good calls” from Beijing. However, the Chinese have downplayed the significance of such calls.
Don’t Shun Equities
Contrary to popular belief, there are stocks that do well during economic slowdowns. Prominent among them are defensive stocks. These stocks are generally non-cyclical, or companies whose business performance and sales are not highly correlated with activities in the larger market. Their products are in constant demand, irrespective of market volatility, and such names include companies from the utilities and consumer staples sectors.
Utilities are deemed defensive stocks as electricity, gas and water are essentials. Food companies are true defensive plays as demand for such staple stocks remains unaltered despite market gyrations.
The idea of investing in “vice” stocks can also be considered. After all, products or services in this space are relatively inelastic, and business is slowdown-proof. The very nature of their business ensures a stable stream of consumers, irrespective of market conditions, which eventually leads to higher margins and solid profits.
Noteworthy vice stocks include beer and gaming companies. Lest we forget, booze consumption is increasing at a slow but steady pace this year, according to data researcher Nielsen. Meanwhile, robust initiatives helped multi-jurisdictional gaming companies progress by leaps and bounds. But let’s admit that things are looking up for such companies mostly due to improved consumer confidence.
5 Solid Choices
We have, thus, selected five stocks from the aforesaid areas that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Alliant Energy Corporation LNT operates as a utility holding company that provides regulated electricity and natural gas services in the Midwest region of the United States. It has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 0.4% in the past 90 days. The stock’s expected earnings growth rate for the current year is 3.7% versus the Utility - Electric Power industry’s estimated rally of 3.3%.
Unitil Corporation UTL engages in the distribution of electricity and natural gas in the United States. It has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 0.9% in the past 60 days. The stock’s expected earnings growth rate for the current year is 4% versus the Utility - Electric Power industry’s expected rise of 3.3%.
General Mills, Inc. GIS manufactures and markets branded consumer foods. It has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 0.9% in the past 90 days. The stock’s expected earnings growth rate for the current year is 4.7% versus the Food - Miscellaneous industry’s estimated rally of 3.3%.
Anheuser-Busch InBev SA/NV BUD engages in the production, distribution, and sale of beer, alcoholic beverages, and soft drinks. It has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 8.8% in the past 60 days. The stock’s expected earnings growth rate for the current year is 47.1% against the Beverages - Alcohol industry’s projected decline of 2.3%.
Penn National Gaming, Inc. PENN owns and manages gaming and racing facilities, and operates video gaming terminals with a focus on slot machine entertainment. It has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 10.5% in the past 60 days. The stock’s expected earnings growth rate for the current year is 69.9% versus the Gaming industry’s projected rally of 4.4%.