U.S. equities did eke out gains lately but the trend has been a downward one. Stocks remained in the negative territory over the last two weeks while the month is poised to register the steepest fall since January. With third-quarter earnings expected to be on the weaker side, a stronger dollar is adding to the woes. Biotech slump coupled with election-induced broader market volatility are also playing spoilsport.
Barring domestic concerns, China’s lackluster export numbers also make us believe that global growth is petering. HSBC Holdings plc HSBC has already warned of a severe stock market crash ahead. Amid all these, investors should trust blue-chip stocks which are capable of braving such market upheavals.
Let us know look at what’s plaguing the broader markets this month:
Earnings Weak, Dollar Strong
In spite of strong results from major banks, the third-quarter earnings growth for the S&P 500 index is expected to decline 2.2% year over year. While energy remains one of the biggest drags, major sectors like technology, autos and transportation also lack shine.In fact, earnings growth is expected to take a beating in the third quarter, which will be the sixth straight quarter of a decline for the S&P 500 index (read more: What Will the Q3 Earnings Season Bring?).
Weak earnings indicate that investors are not getting value for their investments in such stocks. Add to this a stronger dollar, and investors are sure in a fix. A stronger dollar means reduced sales for U.S. multinationals, which could compel companies to trim earnings outlooks in the upcoming quarters.
The biotech market has also started to lose steam and has weighed considerably on the Nasdaq. The iShares Nasdaq Biotechnology (IBB) tanked 21.4% on a year-to-date basis and is currently trading below both the 50-day and 200-day moving averages as investors continue to reduce their risk appetite. Biotechs are generally considered a proxy for bullish bets.
ISHARES NDQ BIO Price
Fresh opinion polls show that Clinton has an edge over Trump heading into the elections next month. An NBC News/Wall Street Journal poll released on Monday showed that Clinton had 48% support among likely voters, while Trump garnered a 37% vote. If Clinton is likely to win the race for the White House, then it’s not good news for biotech stocks. Clinton’s attack on drug pricing had left biotechs reeling.
Election to Spike Volatility
Thanks to the approaching presidential elections, the market is expected to be more volatile. The CBOE Volatility Index has always risen considerably in the month of October for the past six presidential elections, except for 1996, when Bill Clinton handily won the re-elections.
According to the Stock Trader’s Almanac, which dates back to 1950, the S&P 500 averages a decline of 0.7% and the Dow industrials average a 0.8% drop this month. The performance of more-volatile indices like the Nasdaq and the Russell 2000 is worse, with an average setback of over 2% (read more: Here's How Presidents and Elections Affect the Stock Market).
China Concerns Resurface
Meantime, investors grew jittery over a decline in China’s exports. Global demand for goods from the world’s second-largest economy remained sluggish. Such a decline in exports, an important indicator of its economic strength, is expected to weigh on economic growth.
For the month of September, China’s exports plummeted 10% from a year earlier, according to the General Administration of Customs. China’s shipments abroad have softened for the sixth-straight month in September. Lest we forget, it was China’s weak economic growth that had sent global markets into a tailspin and the U.S. wasn’t spared either.
HSBC Predicts Market Crash: 4 Blue-Chips to the Rescue
Thanks to the aforementioned factors, the broader markets are turning out to be an ugly mess. Murray Gunn, the head of technical analysis for HSBC, last week warned that his team has declared “RED ALERT” as they expect further sell-off in the near term. He came to the conclusion with the help of a form of technical analysis referred to as the Elliott Wave Principle.
Thus, in such tough times, investors should turn to blue-chip stocks. These stocks have large market capitalization, strong balance sheets and solid cash flow. They are stable companies even during market downturns. They preserve capital and provide juicy dividends (read more: What is a 'Blue-Chip Stock').
We have selected four such blue-chip stocks that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy). Additionally, we have narrowed down our search with a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
The Home Depot, Inc. HD operates as a home improvement retailer. The company has a Zacks Rank #2 and a VGM score of ‘A’. The company’s estimated earnings growth rate for this year is 17.3% while it provides dividend of 2.18%.
Philip Morris International, Inc. PM manufactures and sells cigarettes, tobacco products, and other nicotine-containing products. The company, with a Zacks Rank #2 and VGM score of ‘B’, has an estimated earnings growth rate of 2.8% while it provides dividend of 4.34%. You can see the complete list of today’s Zacks #1 Rank stocks here.
UnitedHealth Group Incorporated UNH operates as a diversified health and well-being company in the United States. The company has a Zacks Rank #2 and a VGM score of ‘B’. UnitedHealth’s estimated earnings growth rate for this year is 22.7%, while it provides dividend of 1.87%.
Applied Materials, Inc. AMAT provides manufacturing equipment, services, and software to the semiconductor, display, solar photovoltaic (PV), and related industries worldwide. The company has a Zacks Rank #1 and a VGM score of ‘B’. Applied Materials’ estimated earnings growth rate for this year is 47.1%, while it provides dividend of 1.43%.
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