U.S. Markets closed

5 Value Picks to Counter Yield Inversion of Government Bonds

Nalak Das

On Mar 22, the U.S. stock market retreated owing to a yield curve inversion between the 3-month US Treasury Note and 10-year US Treasury Note. The Dow, S&P 500 and Nasdaq Composite plunged 1.8%, 1.9% and 2.5%, respectively, on the day. The yield inversion was mainly caused by the Fed’s extra dovish monetary stance, which triggered investors’ concerns about a global economic slowdown.

However, according to Fed, the fundamentals of the U.S. economy remain strong. Meanwhile, the global economy will get a boost if the trade tussle between the United States and China is settled. Thus, the recent stock market meltdown could be a good buying opportunity. At this stage, it would be prudent to pick value stocks with a favorable Zacks Rank to cushion the portfolio as well as to make some gains from the upside potential.

Inverted Yield Curve Does Not Hint at Immediate Recession

On Mar 22, yield on 3-month US Treasury Note surged ahead of 2-year, 5-year ad 10-year US Treasury Notes. Yield curve inversion generally implies market’s diminishing expectations about future economic growth. Specifically, inversion between the 3-month and 10-year bond yields is recognized by several financial experts as a clear indication of an imminent recession. The yield on the 10-year Treasury note fell below the yield on the 3-month Treasury bill for the first time since 2007.

However, an inverted yield curve does not indicate immediate recession. It may happen after a year or two or even later. A survey by research firm Credit Suisse shows that historically, U.S. stocks rose 15% on average in the 18 months following yield inversions. The study also revealed that it took nearly 24 months for the stock market to enter recession after yield curve inversion.

Despite the yield inversion between 3-month and 10-year US Treasury Notes, the yield curve between 2-year Treasury Note and 10-year Treasury Note is still upward sloping. Several financial experts consider this yield curve as a more powerful indicator of an impending recession.

Positive Development on Trade Front

Second, the 11-month long trade dispute between the United States and China is headed toward a possible settlement. If this happens, a major concern for the global economy will be eliminated. On Mar 20, Trump mentioned that negotiations with China for a trade deal "is coming along nicely."

This week, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Beijing for another round of discussions with Chinese authorities. The International Monetary Fund has identified ongoing the tariff tussle between the countries as the primary factor behind a perceived global economic slowdown in 2019.

Our Top Picks

At this stage, it will be prudent to buy value stocks on the dip that could prove profitable once the rally resumes. We have selected four stocks with a Value Score of A or B and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best opportunities in the Value-investing space.

RH RH operates as a retailer in the home furnishings. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.2, lower than the industry average of 16. It has a PEG ratio of 0.76, below the industry average of 0.83. The company has expected earnings growth of 18.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 60 days. It has a Value Score of A.



Foot Locker Inc. FL operates as an athletic shoes and apparel retailer. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 11, lower than the industry average of 12.4. It has a PEG ratio of 1.2, lower than the industry average of 1.25. The company has expected earnings growth of 10% for the current year. The Zacks Consensus Estimate for current-year earnings has risen 5.7% over the last 60 days. It has a Value Score of A.



Quanta Services Inc. PWR provides specialty contracting services in the United States, Canada, Australia, Latin America, and internationally. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 10.4, lower than the industry average of 14.4. It has a PEG ratio of 1.30, below the industry average of 1.33. The company has expected earnings growth of 25.3% for the current year. The Zacks Consensus Estimate for current-year earnings has moved 7.3% north over the last 60 days. It has a Value Score of A.


Celgene Corp. CELG provides specialty contracting services in the United States, Canada, Australia, Latin America, and internationally. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.2, lower than the industry average of 21.6. It has a PEG ratio of 0.37, below the industry average of 1.85. The company has expected earnings growth of 21% for the current year. The Zacks Consensus Estimate for current-year earnings climbed 3.5% over the last 60 days. It has a Value Score of B.



CBRE Group Inc. CBRE operates as a commercial real estate services and investment company worldwide. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.5, below the industry average of 13.8. It has a PEG ratio of 1.23, lower than the industry average of 1.81. The company has expected earnings growth of 8.8% for the current year. The Zacks Consensus Estimate for current-year earnings moved 5.6% up over the last 60 days. It has a Value Score of B.


Today's Best Stocks from Zacks

Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.

This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.

See their latest picks free >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Quanta Services, Inc. (PWR) : Free Stock Analysis Report

Celgene Corporation (CELG) : Free Stock Analysis Report

Foot Locker, Inc. (FL) : Free Stock Analysis Report

Restoration Hardware Holdings Inc. (RH) : Free Stock Analysis Report

CBRE Group, Inc. (CBRE) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research