As businesses and consumers turned cautious with their spending, the U.S. economy posted its weakest quarterly growth in two years between January and March. Investors’ confidence about the health of the economy also dwindled, with one of the key indicators touching a record low last week.
Stocks in defensive groups offer a good way to earn some decent returns in this slow growth environment. These stocks remain unperturbed by economic hurly-burlies.
Weak Spending Cloud Q1 Growth
The U.S. economy expanded at an annualized rate of 0.5% in the first quarter, its slowest pace in two years, according to the Commerce Department. This growth was way below last quarter’s growth rate of 1.4%. In response to weak global financial conditions and slump in oil prices, companies tightened their belts, resulting in lackluster economic growth in the opening months of the year.
Business investment tumbled the most in almost seven years. Nonresidential fixed investment or spending on equipment, structures and intellectual properties plummeted 5.9% at an annualized rate in the first quarter. Thanks to the significant decline in oil prices, capital spending on wells and shafts nosedived 86% in the quarter, the most since 1958.
As for consumer spending, which accounts for about two-thirds of the U.S. economy, the picture was also discouraging. Household purchases increased at an annual pace of 1.9%, which is much less than the 2.4% increase in the final quarter of last year. In fact, purchases went up the least since early 2015. Spending failed to gain traction despite having consumer friendly fundamentals like low gasoline prices, lower borrowing costs, a steady rise in hiring and mostly warmer-than-expected winter weather, implying lower utility bills.
Retail Sales Weak, Orders Remain Flat
Retail sales a key barometer of consumer spending also dropped in March. Sales at retail stores and restaurants in the U.S. declined 0.3% from last year as people trimmed their spending on car purchases, according to the Commerce Department. Auto sales plummeted 2.1% last month, the steepest decline in more than a year.
Orders for nondefense capital goods excluding aircraft remained unchanged in March after a downwardly revised 2.7% decline in February, according to the Commerce Department. This flat reading suggests that this important gauge of business spending has little or almost no momentum heading into the second quarter.
American’s Confidence Shrinking
Lukewarm business and consumer spending together weighed on the U.S. economy in the first quarter. American’s confidence in the U.S. economy also ebbed. The Gallup U.S. Economic Confidence Index averaged a negative 16 for the week ending Apr 24.
This figure showed a four-point drop from the previous week’s average. The figure also touched its lowest point this year. The index not only rates how citizens feel about current economic conditions but also whether the economy is improving or getting worse.
5 Stocks to Buy for a Slow Economic Growth
Given the pessimism about the state of the economy and weak spending levels resulting in soft growth, it will be wise to invest in stocks associated with the so-called defensive sectors like the utilities, consumer staples and healthcare. Stocks from such sectors tend to be immune to the vagaries of the economy and in the process provide promising returns.
Demand for items such as electricity, gas and water tends to remain stable all through the year irrespective of the broader economic outlook. This makes investing in companies from the utilities sector a lucrative option. Utility companies boast predictable cash flows and generally give dividends to their investors. Steady dividend payments provide income to investors, which eventually make the stocks less volatile.
Food, beverages and personal care products are also essential, which makes investing in consumer staples companies a good option. Similarly, healthcare products and services are indispensable. This makes healthcare companies less susceptible to economic cyclicality. A slew of mergers and acquisitions, and an increase in innovative product pipelines and approvals will also collectively act as growth facilitators for healthcare firms.
We have selected five stocks from the aforementioned defensive sectors that boast a Zacks Rank #1 (Strong Buy) or #2 (Buy). However, it is important to remember that picking winning stocks may not be easy. Hence, 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 scores. Such a score allows you to eliminate the negative aspects of stocks and select winners.
MYR Group, Inc. MYRG through its subsidiaries provides electrical construction services in the United States and Canada. MYRG is headquartered in Rolling Meadows, IL. MYRG has a Zacks Rank #2 and a VGM Score of ‘B’.
Coty Inc. COTY, with its subsidiaries, manufactures, markets, and distributes beauty products worldwide. COTY is headquartered in New York. COTY has a Zacks Rank #2 and a VGM Score of ‘B’.
Kellogg Company K manufactures and markets ready-to-eat cereal and convenience foods. Kellogg is headquartered in Battle Creek, MI. The company has a Zacks Rank #2 and a VGM Score of ‘B’.
HCA Holdings, Inc. HCA through its subsidiaries provides healthcare services in the U.S. HCA is headquartered in Nashville, TN. HCA has a Zacks Rank #2 and a VGM Score of ‘A’.
Emergent BioSolutions, Inc. EBS is a specialty biopharmaceutical company that manufactures and sells specialized products to healthcare providers and governments in the U.S. EBS is headquartered in Gaithersburg, MD. EBS has a Zacks Rank #1 and a VGM Score of ‘B’.
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