September proved to be impressive for Wall Street despite being historically the worst month for stocks. The month saw the Dow and the S&P 500 hit new record closing highs. However, volatility has returned to Wall Street in October as fresh concerns over the economy’s health have dented investors’ sentiment.
Given the ongoing volatility, it would be ideal to invest in defensive stocks like utilities and consumer staples like American Electric Power Company, Inc. AEP, American Water Works Company, Inc. AWK, Fortis, Inc FTS, The Clorox Company CLX and Diageo plc DEO.
Volatility Grips Wall Street
The Dow posted its worst day since early September on Wednesday as higher treasury yield weighed on investors’ sentiment. The S&P 500 and the Nasdaq, too, suffered heavy losses. The Dow, S&P 500 and Nasdaq declined 1%, 0.9% and 1.6%, respectively.
The Dow and S&P 500 have now declined for the third straight session. The volatility has been continuing since the inflation report was released earlier this month. The latest economic data showed inflation ticking up slightly in September after declining sharply in the previous months.
The consumer price index (CPI) rose 0.2% month over month in September, which came in line with August’s increase but was above the consensus estimate of a rise of 0.1%. Year over year, CPI rose 2.4%, the smallest increase in over three and a half years. However, core CPI, which strips out the volatile food and energy prices, climbed 3.3% year over year, surpassing the consensus estimate of a rise of 3.2%.
The fresh data raised concerns of a slowing economy, reigniting fears of a lingering recession. Treasury yields, too, have been on the rise over the past month. On Wednesday, the benchmark 10-year Treasury yield rose to 4.25%, hitting its highest level since July 26.
Consumer Sentiment Dented
The Federal Reserve slashed interest rates by 50 basis points in its September FOMC meeting after inflation showed signs of easing till August. This is the first time the Federal Reserve has cut interest rates since March 2020.
The current benchmark policy rate is between 4.75% and 5%, marking the lowest level since April 2023. Markets are optimistic that the Fed will go for two more rate cuts of 25 basis points each in November and December.
However, fresh inflation data has ignited fears that the Federal Reserve could slow down on its pace of rate cuts. This saw consumer sentiment hitting a low in October. The University of Michigan's preliminary reading showed consumer sentiment fell to 68.9 in October from the final reading of 70.1 the previous month.
Economists had predicted a reading of 70.8. Persistently high prices and concerns about a slowing economy have negatively impacted consumer sentiment compared to the peaks reached the month before. Also, the survey's measure of one-year inflation expectations increased to 2.9% from 2.7% the prior month.
Low-Beta Defensive Stocks a Safe Bet
In light of this situation, investors should create a strategy focused on low-risk investments, highlighting a combination of factors that enhance returns. Effective approaches involve investing in defensive stocks like consumer staples and utilities, while prioritizing those with low beta (between 0 and 1), high dividend yields, and a strong Zacks Rank.
Each of these stocks carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
American Electric Power Company
American Electric Power Company, Inc. is a public utility holding company, which, through directly and indirectly owned subsidiaries, generates, transmits and distributes electricity, natural gas and other commodities. AEP is one of the largest integrated utilities in the United States, serving nearly 5.6 million customers in 11 states.
American Electric Power Company’s expected earnings growth rate for the current year is 6.7%. The Zacks Consensus Estimate for current-year earnings improved 0.2% over the past 60 days. AEP currently carries a Zacks Rank #2. American Electric Power Company has a beta of 0.54 and a current dividend yield of 3.52%.
American Water Works Company
American Water Works Company, Inc. provides essential water services to over 14 million customers in 24 states and has an employee strength of 6,500. AWK also acquires small water service providers to expand its customer base.
American Water Works Company has an expected earnings growth rate of 7.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 60 days. AWK presently carries a Zacks Rank #2. American Water Works has a beta of 0.69 and a current dividend yield of 2.17%.
Fortis, Inc
Fortis, Inc. is engaged in electric and gas utility business. FTS offers regulated utilities comprising electric and gas as well as engages in non-regulated hydroelectric operations. Fortis operates primarily in Canada, the United States and the Caribbean.
Fortis has an expected earnings growth rate of 3.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.3% over the last 60 days. Currently, FTS carries a Zacks Rank #2. Fortis has a beta of 0.47 and a current dividend yield of 3.82%.
The Clorox Company
The Clorox Company is engaged in the production, marketing and sale of consumer products in the United States and international markets. CLX sells its products primarily through mass merchandisers, grocery stores and other retail outlets.
The Clorox Company has an expected earnings growth rate of 7.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 60 days. Currently, CLX carries a Zacks Rank #2. Clorox Company has a beta of 0.41 and a current dividend yield of 3.07%.
Diageo plc
Diageo plc operates in approximately 180 countries and is involved in producing, distilling, brewing, bottling, packaging as well as distributing spirits, wine and beer. DEO offers its products under globally recognized flagship brands, such as Smirnoff, Johnnie Walker, Captain Morgan, Baileys, Buchanan’s, J&B, Tanqueray and Guinness.
Diageo has an expected earnings growth rate of 1.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 60 days. Currently, DEO has a Zacks Rank #2. Diageo has a beta of 0.69 and a current dividend yield of 3.67%.
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