Fed Lowers GDP Estimates For 2018 & 2019: 5 Defensive Picks

On Dec 19, the Federal Reserve raised the benchmark lending rate for the fourth time in 2018, and reduced its outlook for U.S. GDP growth rate of 2018 and 2019. Lingering trade conflict with China, an impending global economic slowdown and several geopolitical crises are likely to hinder the growth of the U.S. economy.

The U.S. stock markets have been bearing the brunt of extreme volatility throughout 2018, especially in the last three months. At this juncture, it would be a prudent decision to pick up defensive stocks with favorable Zacks Rank to cushion your portfolios.

Fed Lowers GDP Growth Rate Projections

On Dec 19, the Fed raised benchmark lending rate by a quarter percentage point to the range of 2.25-2.50%. This was the fourth rate hike by the central bank in 2018. However, the Fed hinted that it may lower the pace of rate hike from the previous projections of three to two times 2019 and is likely to be only one in 2020.

The reason for Fed’s dovish stance is its current outlook for the U.S. economy. The central bank estimated that the U.S. economy will grow 3% and 2.3% in 2018 and 2019 respectively, lower than earlier forecast of 3.1% and 2.5% in September. Unemployment rate has been kept unchanged at 3.7% and 3.5% in 2018 and 2019, respectively. Core PCE inflation rate is now projected at 1.9% and 2% in 2018 and 2019 respectively, lower than previous projections of 2% and 2.1% in September.

A drop in the expected growth rate of U.S. GDP and inflation has prompted the central bank to look for a less aggressive monetary stance.

US-China Trade Conflicts Remain Unresolved

An amicable solution to the trade related conflict between the United States-China following the Dec 1 meeting between President Trump and his Chinese counterpart Xi Jinping is yet to reach.

On Dec 19, U.S. Treasury Secretary Steven Mnuchin said that the United States and China will meet in January 2019 to seek trade solutions. However, confusion has amplified regarding China’s intentions of taking adequate measures to stop technology theft from the United States.

Uncertainty also persists about the extent to which it will open up markets to U.S. companies and provide concessions to reduce trade imbalance between the two countries. Moreover, on Dec 9, U.S. Trade Representative Robert Lighthizer said that he considers Mar 1 "a hard deadline" to reach a deal with China, failing which, the tariff war is likely to go on.

Wall Street Remains Lackluster in 2018

U.S. stocks have had a rough run so far in 2018 after providing fabulous returns in 2017. All three major stock indexes – the Dow, S&P 500 and Nasdaq Composite – are in negative territory year to date with a decline of 5.7%, 6.2% and 3.9%, respectively. All three indexes are in correction territory at present. Notably, Wall Street has suffered its worst start in December to 38 years. Each of these indexes is down over 8% over December so far.

Our Top Picks

Stock markets are likely to remain volatile in near future owing to trade concerns, geopolitical conflicts and may be some sector specific issues. At this stage, investment in defensive sectors such as utilities, telecom and consumer staple will be fruitful. We have narrowed down our search on five stocks with a Zacks Rank #1 (Strong Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date

Middlesex Water Co. (NASDAQ:MSEX) procures, transports, stores, processes, and merchandises agricultural commodities and products. The company has expected earnings growth rate of 42% for the current year. The Zacks Consensus Estimate for the current year has improved 6.5% over the past 60 days.

Ubiquiti Networks Inc. (NASDAQ:UBNT) develops networking technology for service providers, enterprises, and consumers. The company has expected earnings growth rate of 11.7% for the current year. The Zacks Consensus Estimate for the current year has improved 19.8% over the past 60 days.

LM Ericsson (BS:ERICAs) (NASDAQ:ERIC) provides information and communications technology solutions for networks, IT and cloud, and media markets globally. The company has expected earnings growth rate of 159.6% for the current year. The Zacks Consensus Estimate for the current year has improved 21.7% over the past 60 days.

Otter Tail Corp. (NASDAQ:OTTR) engages in electric, manufacturing, and plastics businesses in the United States. The company has expected earnings growth rate of 10.2% for the current year. The Zacks Consensus Estimate for the current year has improved 2.5% over the past 60 days.

Arista Networks Inc. (NYSE:ANET) provides cloud networking solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. The company has expected earnings growth rate of 37.8% for the current year. The Zacks Consensus Estimate for the current year has improved 5.5% over the past 60 days.

In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?

These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>