The U.S. stock markets ended an otherwise choppy first quarter on a higher note, but are still subject to further volatility in the near term. Uncertainty about future oil price movements and investors worried about weak first quarter earnings reports might potentially cut short the stock market’s recent uptrend. The Federal Reserve was also compelled to tone down its rate hike expectations as the central bank believes that downside risks of a fall in oil prices and weak global economy continue to linger.
Given this ambiguity, it is difficult to predict the market’s next direction, which eventually calls for investing in low beta stocks for steady returns. As these stocks are less correlated to the index, they also tend to be less volatile.
Markets End a Roller-Coaster Q1 Higher
What a topsy-turvy first quarter it has been for the U.S. stock market! A big sell-off took place during the first six weeks of the year. Major indexes had entered correction territory and many feared that the broader markets are headed south.
The slump in oil prices to multi-year lows on abundant supply glut, weak Chinese economy and the Fed embarking on a rate hike cycle had dragged the markets down. Investors also remained worries about the adverse effects of a stronger dollar on corporate earnings results. The CBOE Volatility Index (VIX) also known as the market’s “fear gauge” had soared to 28.14 on Feb 11, its highest level this year.
This was, however, followed by a sharp rebound during the second half of February and it continued through March. Oil prices started to recuperate, which mostly boosted commodity stocks. Additionally, the Fed started to backtrack on its earlier commitment of four rate hikes this year, while investors having bearish sentiments started to feel confident during the latter half of the quarter. The major indexes posted record performance in March, while on the other hand, the VIX tanked to 13.56, its lowest level since August.
Volatility to Continue, Oil Essentially Weak
As we look ahead, even though the indexes are moving higher, let’s not forget that the factors that plagued the markets at the start of the year are still looming large. Chief among them will be oil prices. It is expected that on Apr 17 the Organization of the Petroleum Exporting Countries and Russia will discuss an output freeze aimed to shore up prices.
However, Saudi Arabia’s deputy crown prince had said that Saudi Arabia will agree to a production freeze only if Iran consents to do the same. Iran, conversely, increased crude exports and backed away from production cuts. So, there is no certainty to a sustained boost to oil prices. Add to this, a massive and persistent supply glut making it clear that the oil market is still fundamentally weak. This in turn raises serious concerns about the broader markets’ upward trajectory, as the major indexes have shown close affinity to the movement of oil.
Heading for a Dismal Earnings Season
There is another impending fear factor. Corporate earnings have turned negative for the first half of the year. Total earnings for the first quarter are expected to decrease by 10.3% on 2% lower revenues from the same period last year. This will result in an earnings decline for the fourth quarter in a row.
It is expected that there will be broad-based moderation in earnings growth in the first quarter, with 11 out of 16 Zacks sectors to register negative returns. The energy sector is expected to bleed the most, with no substantial help coming from other large sectors such as technology and finance. The strength in the dollar and global growth constraints will be mostly responsible for this dismal outcome.
Total Q2 earnings are also expected to go down by 5.4% on 2.1% lower revenues. This doesn’t bode well for stocks as weak earnings results will surely have a negative impact on the broader markets (read: Previewing the Q1 Earnings Season).
Rate Hike Uncertainty
Along with gloomy earnings outlook, the Fed has also kept rates unchanged in March. Further, the Fed expects rate hikes to be gradual in the future as economic growth this year is to be weaker than expected. New orders for factory goods declined in February and business spending on capital goods was weaker than expected. This came over and above weak consumer spending and trade data.
The U.S. economy is also not immune to global risks. These risks include oil and China. Yellen remained worried that another drop in oil prices might lead to spending cuts by oil-driven countries and job losses in the energy sector. And, as discussed above, it seems that the oil market isn’t out of the woods yet. She was also concerned about China’s economic slowdown and the direction of its currency.
5 Low Beta Stocks to Buy
Markets have gained momentum in the last one and a half months, thanks to a rebound in oil prices and Fed’s assurance to “proceed cautiously” when it comes to raising rates. However, underlying risks remain such as abundant oil supply, negative earnings and weak economy, which might pull the markets down in the near future. Moreover, the Fed while refraining from raising rates warned that the U.S. economy isn’t strong enough to sustain the implications of increasing borrowing costs.
Given the cross currents, we can expect gyrations in the stock market. And with the Presidential election ahead, investors must be bracing themselves for more volatility. In this uncertain climate, it will be prudent to bet on low-beta stocks. Such stocks, shielded from day-today fluctuations, provide protection during turbulent times.
Here we have selected five stocks that have a beta less than 0.7, indicating that the security will be less volatile than the market. These stocks also boast a Zacks Rank #1 (Strong Buy) or #2 (Buy) and are priced under $10 per share.
Capstead Mortgage Corp. CMO operates as a real estate investment trust in the U.S. It invests in a portfolio of residential mortgage pass-through securities. It is based in Dallas, TX. CMO holds a Zacks Rank #2 and has a beta value of 0.38. CMO’s current price is $9.86.
CBIZ, Inc. CBZ provides professional business services, products and solutions in the U.S. It is headquartered in Cleveland, OH. CBZ holds a Zacks Rank #1 and has a beta value of 0.7. CBZ’s current price is $9.99.
First Bank FRBA provides commercial banking products and services to individuals, businesses and governmental in the U.S. It is headquartered in Hamilton, NJ. FRBA holds a Zacks Rank #2 and has a beta value of 0.32. FRBA’s current price is $7.01.
Sterling Construction Co. Inc. STRL operates as a heavy civil construction company in Texas, Utah, Nevada, Colorado, Arizona, California, Hawaii and other U.S. states. It is headquartered in Woodlands, TX. STRL holds a Zacks Rank #2 and has a beta value of 0.57. STRL’s current price is $5.08.
Windstream Holdings, Inc. WIN provides network communications and technology solutions for consumers, businesses, enterprise organizations and carrier partners in the U.S. It is headquartered in Little Rock, AR. WIN holds a Zacks Rank #2 and has a beta value of 0.36. WIN’s current price is $7.84.
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