Wall Street has been facing volatility in the second half of September owing to several economic and political factors. Uncertainty over the U.S.-China trade deal, global economic slowdown, the initiation of an impeachment proceeding against President Donald Trump and some recently released weak economic data are near-term concerns.
At this juncture, investors are concerned that intensifying trade conflict will hurt sales of U.S. multinational companies as their products will be vulnerable in international markets. Domestic-business-oriented companies are mostly immune to external shocks since the United States is the lone market for their products. This will help them to outperform the broader market defying extreme volatility.
U.S.-China Trade Tension Heightens
On Sep 27, Bloomberg reported that the U.S. government is considering limiting U.S. investment in Chinese companies. As part of this broad-based measure, the Trump administration is likely to delist Chinese corporates from U.S. stock exchanges.
Later CNBC also confirmed the news citing a source familiar with the development. However, the source pointed out that no decision has been taken so far and no deadline has been set to meet the target.
Surprisingly, this development has taken place when a high-level trade delegation of China is about to meet its U.S. counterpart in Washington during Oct 10-11. Per the unnamed source, restriction on financial investment in Chinese companies will protect U.S. corporates from excessive risks they are currently exposed to from lack of financial transparency and regulatory supervision of the Chinese government.
At present, Chinese entities, which are listed on U.S. stock markets, are not complying with the U.S. PCAOB (Public Company Accounting Oversight Board) process, resulting in huge risks to U.S. investors.
Chinese companies have a large presence in U.S. capital markets. A total of 156 Chinese companies were listed in the United States. Per the latest data as of February 2019, Chinese corporates command a market capitalization of around $1.2 trillion in several U.S. stock exchanges. Consequently, if President Trump finally takes this decision ongoing trade conflict between the two largest trading countries of the world will certainly be escalated.
Weak Economic Data
The Department of Commerce reported that overall orders for U.S. factory made durable goods increased 0.2% in August compared with an impressive 2% (revised from 2.1% reported earlier) in July. However, orders for core capital goods (non-defense capital goods excluding aircraft) declined 0.2% in August primarily due to weak demand for household machineries. Notably, this metric is a closely watched proxy for business spending plans.
U.S. consumer spending edged up 0.1% in August after surging 0.5% (revised from 0.6% reported earlier) in July. The data indicates that the lingering tariff war with China has started taking a toll on consumer spending aside from a considerable decline in business spending. Notably, consumer spending is the main driver accounting for nearly 70% of the U.S. GDP.
PCE (personal consumption expenditure) price index rose 0.1% in August compared with 0.3% in July. Year over year, PCE inflation grew 1.4%. Core PCE inflation (excluding the volatile food and energy components) edged up 0.1% in August compared with 0.2% in July. Year over year, core PCE inflation increased 1.8%, still below the Fed’s target rate of 2%.
Our Top Picks
At this juncture, investment in domestic business-focused stocks with strong growth potential will be lucrative. All five stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks in the past three months.
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NRG Energy Inc. NRG is the leading integrated power company in the United States, built on the strength of its diverse competitive electric generation portfolio and leading retail electricity platform. The company has an expected earnings growth rate of 65.1% for the current year. The Zacks Consensus Estimate for the current year has improved 1.4% over the last 60 days.
Consolidated Communications Holdings Inc. CNSL offers a wide range of telecommunications services including local and long distance telephone, Digital Phone, High-Speed Internet access and Digital TV to individuals and businesses in the United States. The company has an expected earnings growth rate of 83.3% for the current year. The Zacks Consensus Estimate for the current year has improved 45.5% over the last 60 days.
Exantas Capital Corp. XAN is a real estate investment trust that primarily focuses on the origination, holding and management of commercial mortgage loans and commercial real estate-related debt investments in the United States. The company has expected earnings growth of 60.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.5% over the last 60 days.
Boot Barn Holdings Inc. BOOT is a lifestyle retail chain, operates specialty retail stores in the United States. Its specialty retail stores offer western and work-related footwear, apparel, and accessories for men, women, and kids. It also provides gifts and home merchandise. The company has an expected earnings growth rate of 23.7% for the current year. The Zacks Consensus Estimate for the current year has improved 1.8% over the last 60 days.
Industrial Logistics Properties Trust ILPT is focused on the ownership and leasing of industrial and logistics properties primarily in the United States. Its properties include Hawaii properties, Mainland properties' leases, Hawaii properties' leases and Mainland properties. The company has an expected earnings growth rate of 9.9% for the current year. The Zacks Consensus Estimate for the current year has improved 1.1% over the last 60 days.
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