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Is US Economy Headed for Recession? 5 Low-Beta Picks

Nalak Das

On Mar 22, Wall Street routed on yield curve inversion between the 3-month US Treasury Note and 10-year US Treasury Note. The yield inversion was primarily owing to apprehensions of a global economic slowdown, which will certainly affect the U.S. economy, especially exports.

Although a recession is not in sight for now, volatility in the stock market will persist in the near term. Notably, US - China trade related problem is yet to be resolved and first-quarter 2019 earnings expectations are negative at present.

Yield Curve Inversion: Signaling Recession

On Mar 20, the Fed decided not to hike interest rate in 2019. It also decided to end its balance sheet reduction program in September. The central bank adopted this overtly cautious approach after lowering U.S. GDP growth rate to 2.1% in 2019 from 2.3% projected in December.

Following extra dovish stance of the Fed, yield on benchmark 10-year US Treasury Note declined to 2.437%, its lowest since January 2018. Yield on 5-year US Treasury Note and 2-year US Treasury Note declined to 2.42 and 2.32%, respectively. However, yield on short-term 3-month U.S. Treasury Note stood at 2.459%.

The yields declined as investors transfer their money from risky assets like equities to safe-haven government bonds. The yield curve (which measures interest at any given point of time for bonds of same quality but different maturity dates) of government bonds are generally upward sloping, implying a higher rate of interest is needed for individuals to hold longer maturity bonds.

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 is generally characterized as market’s diminishing expectations about future economic growth. In fact, several financial experts consider inversion between the 3-month and 10-year bond yields as a clear indication of an upcoming recession. This happens for the first time since 2007.

Concerns About Global Economic Growth

Although the Fed is relatively bullish on the fundamentals of the U.S. economy, the central bank is concerned about economic downturn in China and Eurozone — two of the largest trading blocks of the United States. This might cool down the country’s economic fortunes.

On Mar 22, IHS Markit reported that manufacturing PMI of Germany fell to 51.9 in March, its 69-month low. The manufacturing PMI of France also contracted in March to 48.7. The composite manufacturing PMI for the Eurozone fell to 51.3 in March from 51.9 in February.  On Mar 4, the Chinese authority pegged the country’s growth rate in the range of 6 - 6.5% in 2019. Notably, China’s growth rate in 2018 was 6.6%, its lowest growth rate since 1990.

Trade Problems Unresolved, Bleak Earnings Expectations

The year-long tariff related issues between the United States and China is yet to be completely resolved. The IMF cautioned that prolonged trade conflict between the United States and China could result in global economic slowdown in 2019.

First-quarter 2019 consolidated earnings is expected to decline. At present, total earnings for the broad-market S&P 500 index are expected to be down by 3.3% from the same period last year on 5% higher revenues. If actual first quarter earnings growth turns out to be negative, it will be the first earnings decline since the second quarter of 2016. (Read More: Soft Start to Q1 Earnings Season)

Our Top Picks

At this juncture, it will be prudent to invest in in low-beta stocks with favorable Zacks Rank to keep one’s portfolio safe from day-to-day market fluctuations. The beta is equal to 1 which means that the stock is as volatile as the market. So, a stock is relatively more volatile if it has beta greater than 1 and less volatile if beta is less than 1. However, picking winning stocks can be a difficult task.

This is where our VGM Score comes in handy, which helps us to select winners. We narrowed down our search on five stocks. Each of these stock have a Zacks Rank #1 (Strong Buy) and a VGM Score A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.

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

America's Car-Mart Inc. CRMT operates as an automotive retailer in the United States. It has a beta of 0.88 and a VGM Score of A. It has expected earnings growth of 78.6% for current year. The Zacks Consensus Estimate for the current year has improved by 11.2% over the last 60 days.

Rent-A-Center Inc. RCII leases household durable goods to customers on a rent-to-own basis. It has a beta of 0.27 and a VGM Score of B. It has expected earnings growth of 77.4% for current year. The Zacks Consensus Estimate for the current year has improved by 3.3% over the last 60 days.

Deckers Outdoor Corp. DECK designs, markets, and distributes footwear, apparel, and accessories for casual lifestyle use and high performance activities. It has a beta of 0.72 and a VGM Score of B. It has expected earnings growth of 38.2% for current year. The Zacks Consensus Estimate for the current year has improved by 14.8% over the last 60 days.

Abercrombie & Fitch Co. ANF operates as a specialty retailer of two segments - Hollister and Abercrombie. It has a beta of 0.56 and a VGM Score of A. It has expected earnings growth of 20.9% for current year. The Zacks Consensus Estimate for the current year has improved by 41.8% over the last 60 days.

Anthem Inc. ANTM operates as a health benefits company in the United States. It has a beta of 0.93 and a VGM Score of A. It has expected earnings growth of 20.4% for current year. The Zacks Consensus Estimate for the current year has improved by 8.8% over the last 60 days.

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