The first of half of this year was mostly topsy-turvy, with major indices failing to make a big move. While a group of investors showed a lot of optimism on corporate earnings and upbeat labor data, many fear that the Fed's stance to raise interest rate hikes faster might derail the market's upward journey. Intensifying trade tensions between the United States and China may also force the equity market to take a dive after years of growth.
While many investors are reducing their exposure to equities, investors shouldn't completely move away from stocks in the second half of this year. Instead, they should invest in such stocks that are unperturbed by market gyrations and fundamentally strong.
Bulls & Bears End the First Half in a Draw
So far this year, the equity market has been through bouts of volatility, with both bulls and bears finishing the first half of the year almost in a draw. While the S&P 500 is up a meagre 2.3% so far this year, the Dow is down 1.2%. This slight year-to-date movement indicates that even though the general mood is positive, investors do see a lot of downside risks to the market.
Needless to say, the Cboe Volatility Index (VIX) has also seen widespread gyrations in the first half. The volatility index tanked almost 20% since the start of April, which in turn showed how much it actually moved up in the first quarter when inflation-related concerns caused it to more than double in a single day. The VIX has jumped 40% so far in 2018.
Bull & Bear Tug-of-War
Optimists could easily point to rapid growth in corporate profits and a healthy labor market. The current unemployment rate is at an 18-year low of 3.8%, while the jobless claims are almost at the lowest level since the early 1970's. The Goldman Sachs Group, Inc. GS further predicted that the unemployment rate will drop to 3.5% by the end of this year. Wage growth, by the way, rose 2.7% on a year-over-year basis last month and Goldman expects it to accelerate further to a range of 3% to 3.25%.
These positives easily offset growing concerns that America is in the late stage of its economic cycle and that few fund managers expect the equity market to pick up from here. But, it's true that the equity market did trade in a tight range for months. Major bourses like the Dow and the S&P have been in correction throughout the second quarter, the longest stretch since 2008.
This is all because of the policy uncertainty that leads to a rise in tensions between the United States and its major trading partners. The stock market moved up and down on doubts over whether the tariffs signified the opening salvo of negotiations and the possibilities of whether they will get implemented. On the domestic front, issues related to Internet companies also raised concerns of a more aggressive regulatory environment against some of the industry's biggest names.
Amid all these, the Fed has become less accommodative. It has been slowly changing its monetary policy by hiking interest rates and trimming its balance sheet. Lest we forget, a low interest rate environment and the central bank's bond-buying program helped the equity market scale north in the past decade.
This change in Fed's policy, in the meantime, has helped the yield in the U.S. 10-Year Treasury note to move up to 2.82% from 2.41% at the beginning of the year. In February, it rose to 2.94%, a four-year high. With yields rising, investors have pulled money out of stocks and have invested them in bonds. As per Morningstar Direct, nearly $2.26 billion has been pulled from all equity-based funds so far this year, while almost $110 billion has flowed into taxable bond funds.
Barry Bannister, head of institutional equity strategy at Stifel, has aptly said that "years of accumulated policy distortion, a lack of Fed maneuvering room and shock waves from policy are the S&P 500 risks we see, but not corporate earnings or economic growth."
5 Best Stocks to Buy for the Second Half
With fundamentals remaining strong but risks rising, investors should take a conservative stance while designing their portfolio in the second half. The best way to go about doing this is by creating a portfolio of low-beta stocks, which are inherently less volatile than the markets they trade in. In this case, a low beta ranges from 0 to 1.
But, even though low beta stocks pose less risk they provide lower returns. So, in order to boost your returns, we have further zeroed in on stocks that have seen positive earnings estimate revision. Rising earnings estimates generally indicate that the stock will outperform the market in the near future. After all, earnings estimates are one of the most powerful metrics that measure the fundamental strength of a company. To top it, these stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
ABIOMED, Inc.ABMD engages in the research, development and sale of medical devices. The company has a beta of 0.21. The Zacks Consensus Estimate for its current-year earnings increased 1.7% in the last 60 days. The stock is expected to return 42.9% this year, higher than the Medical - Instruments industry's estimated return of 18.9%. The company has outperformed the broader industry so far this year (+118.3% vs -6.7%).
Lululemon Athletica Inc.LULU is an athletic apparel company. The company has a beta of 0.15. The Zacks Consensus Estimate for its current-year earnings rose 3.9% in the last 60 days. The stock is expected to return 23.9% this year, higher than the Textile - Apparel industry's estimated return of 16.9%. The company has outperformed the broader industry in the year-to-date period (+58.9% vs +20.4%).
Insperity, Inc.NSP provides human resources (HR) and business solutions. The company has a beta of 0.86. The Zacks Consensus Estimate for its current-year earnings moved up 0.3% in the last 60 days. The stock is expected to return 39.2% this year, higher than the Staffing Firms industry's estimated return of 26.8%. The company has outperformed the broader industry so far this year (+66.1% vs +2.7%).
DMC Global Inc.BOOM engages in technical product and process businesses serving the energy, industrial, and infrastructure markets. The company has a beta of 0.53. The Zacks Consensus Estimate for its current-year earnings increased 5.7% in the last 60 days. The stock is expected to return 1168.8% this year, way higher than the Industrial Services industry's estimated return of 25.3%. The company has outperformed the broader industry in the year-to-date period (+79.2% vs +13.8%).
The Ensign Group, Inc.ENSG provides health care services in the post-acute care continuum and other ancillary businesses. The company has a beta of 0.68. The Zacks Consensus Estimate for its current-year earnings climbed 0.5% in the last 60 days. The stock is expected to return 34.8% this year, higher than the Medical - Nursing Homes industry's projected return of 16.1%. The company has outperformed the broader industry so far this year (+61.4% vs +14%).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.