December Stock Market Rout Intensifies: 5 Top Utility Picks

 | Dec 09, 2018 08:38PM ET

Last week, Wall Street saw its worst start to December since 2008. The yield curve inversion of government bonds and severe doubts regarding resolution to eight-month old trade war between the United States and China were the primary reasons behind the rout.

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 defensive industry stocks like utilities with a favorable Zacks Rank and strong growth potential.

Wall Street Tumbles in the First Week of December

In the first week of December, all three major stock indexes – the Dow, S&P 500 and Nasdaq Composite – plummeted. The Dow plunged nearly 1,149 points or 4.5%, the S&P 500 declined 97 points or 4.6% and the Nasdaq Composite dropped 361 points or 4.9%. The first week of December was the worst week for U.S. stocks since March.

December stock market rout have placed both the Dow and S&P 500 in negative territory year to date. The Dow and the S&P 500 declined 1.3% and 1.5%, respectively, year to date. Only Nasdaq Composite is still in the green with a minor gain of 1%.

US-China Trade Solution in Jeopardy

Hopes of 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 have all but faded out.

This is because Canadian authorities in Vancouver arrested Meng Wanzhou, Huawei Technologies Co.’s chief financial officer and daughter of its founder Ren Zhengfei on Dec 1. Notably, Wanzhou’s detention for alleged violation of Iranian sanctions by Chinese tech-behemoth Huawei Technologies Co was carried out at the request of the U.S. government.

The situation spiraled further following a The Wall Street Journal report that federal prosecutors are likely to press charges on Chinese hackers on account of hacking valuable technologies of U.S. high-tech firms. 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 Utility Stocks?

The Utilities sector is mature and fundamentally strong as demand for utility services is generally immune to vagaries of the economic cycle. It's because these companies provide basic services like electricity, gas and water, which can never go out of demand. As a result, adding stocks from the utility basket usually lends more stability to portfolios in an uncertain market condition.

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Notably, year to date, S&P 500’s Utilities Select Sector SPDR (XLU) gained 7.2%, just behind the 9.5% increase of Health Care Select Sector SPDR (XLV). Moreever, Utilities Select Sector SPDR (XLU) gained 15.9% in the last six months, the highest of all 11 sectors of the S&P 500.

Our Top Picks

Stock markets are likely to remain volatile in near future due to trade concerns, geopolitical conflicts and interest rate movements. Consequently, investment in defensive sectors such as utilities will be fruitful. We have narrowed down our search on five utility stocks with either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and strong growth potential.

The chart below shows price performance of our five picks year to date.