Wall Street Mayhem To Persist In November: 5 Defensive Picks
Zacks Investment Research | Nov 01, 2018 08:50AM ET
Wall Street has endured a difficult October, its worst monthly performance this year. Notably, all three major stock indexes suffered losses over the month. The Dow fell 5.1%, its biggest monthly drop since January 2016. The S&P 500 slumped 6.9%, its biggest monthly decline since September 2011. Meanwhile, Nasdaq Composite plummeted 9.2%, marking its largest monthly slide since November 2008.
The situation is likely to intensify in the near term with mid-term Congressional elections less than a week away and the Federal Reserve signaling one more rate hike this year. Lingering trade conflicts with China and concerns regarding the longevity of earnings momentum may result in more volatile trading in Wall Street going forward. At this juncture, it would be prudent to pick defensive stocks with a favorable Zacks Rank to cushion the portfolio.
US-China Trade War Intensifies
On Oct 29, Bloomberg reported that United States is preparing to impose tariffs on all residual imports from China in early December, if trade related negotiations between President Trump and Chinese president Xi Jinping fail to resolve trade conflicts. The latest round of tariffs could be worth $257 billion. Notably, the Trump administration has already imposed $250 billion tariffs on Chinese goods while China levied $110 billion of retaliatory tariffs on U.S. imports.
On Oct 8, the IMF projected that global growth rate will be 3.7% for both 2018 and 2019, a decline of 0.2% from its earlier projection given in July due to the trade conflicts between the United States and China.
Concerns Regarding Fed’s Monetary Policy
The Federal Reserve has already increased benchmark interest rate three times in 2018. Each time the rate was increased by a quarter percentage points. Despite this, in October, Fed chair Jerome Powell announced interest rates have a long way to go before hitting neutral, a clear indication of further rate hikes. Higher interest rate will raise the cost of funds of investing in risky assets like equities. Instead investors may be better off investing money in risk-free government securities.
Will Earnings Momentum Continue?
As of Oct 31, 313 of the S&P 500 members have reported third-quarter earnings. For these companies, total earnings are up 22.7% year over year on 8.4% higher revenues. Despite strong showing, third-quarter growth momentum has slowed down from the first half of 2018. For full-year 2018, total earnings for the S&P 500 are expected to be up 21% on 6.7% higher revenues. For full-year 2019, total earnings are expected to be up 9.7% on 5.6% higher revenues. This clearly indicates that earnings momentum is likely to decline going forward. (Read More: Zacks Investment Research
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