5 Top Basic Materials Stocks To Buy On June Turnaround

After a disappointing May, the basic materials sector is witnessing an impressive turnaround in June. This sector suffered last month owing to a host of factors including the U.S.-China trade war, concerns over lower demand from China and higher raw materials costs.

The basic materials sector is made up of companies involved in the discovery, development, and processing of raw materials used in manufacturing and construction including steel, aluminum, chemicals and forestry products. Consequently, these stocks are sensitive to business cycle and likely to thrive when the economy is strong.

The trade conflict with China is persisting with no sign of an immediate resolution. Despite the trade tussle and threat of a global economic slowdown, the sector is flourishing primarily on strong market sentiment courtesy of interest rate cut signal by the Fed and rate reductions made by other central banks.

Basic Materials Sector Rebounds

The Materials Select Sector SPDR (XLB), one of the 11 broad sectors of the benchmark S&P 500 Index, has gained 9.6% so far in June. At present, XLB is the best performing sector of the S&P 500 Index for this month since October 2015, when it registered a rally of 13.5%.

At its current level of 57.78, XLB is well above 50-day and 200-day moving averages of 56.03 and 54.97, respectively. The 50-day and 200-day moving averages are important technical barriers providing short-term and long-term support levels. Moreover, in the past month, XLB has been the best performing sector with a gain of 4.8% despite severe volatility. Year to date, this sector has rallied 14.4%.

High Expectations of Rate Cut

The primary reason for this impressive performance of the basic materials sector is the expectation of interest rate reduction by the Fed. According to CME FedWatch tool, 65% responders were hoping for a rate cut in 2019 on Jun 3.

However, after Powell’s speech on Jun 4, in which he hinted at a possible rate cut, more than 90% of the responders are expecting a rate cut by September and 80% foresee a likely second cut by the end of December.

After the release of weak job data for May on Jun 7, market expectations of a Fed rate cut in June rose to 27.5% from 16.7%. Moreover, the market is also predicting a 79% chance of lower Fed rates by July. On Jun 14, the CME FedWatch tool said that 85.3% responders are expecting a rate cut by the Fed in July.

The Fed is yet to commit an interest rate reduction anytime soon. On Jun 4, Jerome Powell said that the central bank is watching current economic developments and will “act as appropriate to sustain the expansion.” However, his comments have been considered as a strong signal.

Moreover, recently released tepid economic data like job growth, manufacturing PMI and factory orders as well as subdued inflation have acted as catalysts for investors to consider strong ground for a possible rate cut. This sentiment boosted the basic materials sector.

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Out Top Picks

Against this backdrop, we have narrowed down our search to five basic materials stocks with strong growth potentials. Each of these stocks sport either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see Zacks Investment Research