Zacks Investment Research | May 20, 2019 09:17PM ET
U.S. equities moved lower on May 20 after trade relations between the United States and China worsened. Much of the damage occurred in technology shares, which have largely powered a record-busting market rally. The decline in tech blue-chips demonstrated their vulnerability to a prolonged trade war. Meanwhile, the escalation of trade tensions has raised the odds of a global economic slowdown.
With volatility likely to remain high, defensive stocks have grabbed investors’ attention. These stocks offer slower but stable growth during periods of uncertainty. Fresh evidence indicates that they may even have been leading the current market rally for nearly a year now on a total return basis. Since they also offer higher-than-average yields, investing in defensive stocks looks like a prudent option at this point.
Trade Tensions, Global Slowdown Fears Rise
The slide in U.S. equities was triggered by the Trump administration’s ban on Huwaei Technologies. According to Bloomberg, major U.S. chipmakers, including Xilinx (NASDAQ:XLNX) , Intel (NASDAQ:INTC) , Qualcomm (NASDAQ:QCOM) and Broadcom (NASDAQ:AVGO) have ceased to supply Huawei with critical components. Subsequently, U.S. chipmakers declined as blue-chip tech stocks took a massive hit.
Equity market losses took place as U.S.-China trade tensions worsened over the weekend. According to CNBC, scheduling for the next round of talks is “in flux” since both sides are unwilling to climb down from their current stands. Multiple China-based analysts think China has little reason to participate in talks since the United States is unwilling to make any concessions, per the South China Morning Post.
An escalating U.S.-China trade war is starting to weigh on the global economy. According to Morgan Stanley (NYSE:MS) , a global recession is a near certainty if both sides are unable to seal a deal quickly. On May 15, China released dismal retail sales, investment and industrial output numbers. Meanwhile, U.S. retail sales slipped in April even as factory output declined.
Defensive Stocks Grab Investor Attention
Amid rising market volatility, defensive stocks have grabbed investor attention. According to a note released by Morgan Stanley, real-estate, utilities and consumer-staples have led gains for the S&P 500 index since June 2018 on a total-return basis. The extent of their influence on stock movement has been masked by the focus on the 2018 rally, the correction which followed, and the revival in equities this year.
(Source: Goldman Sachs (NYSE:GS))
Such sectors corner the spotlight when fears of economic outlook increase. According to Morgan Stanley, the rise in defensive stocks may partially explain the year-to-date surge in U.S. equities. This is a reflection of concerns surrounding global growth and a prolonged trade war.
Further, there are some outstanding issues, which need to be resolved before investors opt for riskier options. U.S. business inventories are mounting, and could weigh on the bottom lines of domestic companies. Also, major cloud-computing powers such as Facebook (NASDAQ:FB) are cutting capital outlays in the face of slowing demand. Finally, costs are rising due to a tighter labor market and the impact of tariffs.
Our Choices
With a resolution to the U.S.-China trade war remaining elusive, market volatility is on the rise. And as Morgan Stanley predicts, a full-fledged trade war could result in a global recession. It comes as no surprise, therefore, that defensive stocks have remained the preferred option of investors for nearly a year now.
Investing in defensive stocks, which offer a safe and stable choice during periods of uncertainty looks like a good option at this point. Further, they carry the promise of above-average dividend yields. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Middlesex Water Company (NASDAQ:MSEX) is an owner and operator of water utility and wastewater systems.
Middlesex Water’s expected earnings growth for the current year is 10.7%. The Zacks Consensus Estimate for the current year has improved by 5.9% over the past 30 days. The stock has a dividend yield of 1.6% and currently sports a Zacks Rank #1 (Strong Buy). You can see Zacks Investment Research
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