Markets Turn Volatile: 5 Defensive Stocks to Buy

Barchart · 10/16 14:02

Volatility has returned to Wall Street after a solid September rally following the Federal Reserve’s rate cut announcement. The volatility followed fresh data, which showed that inflation increased slightly in September.

Also, lingering frustration over high commodity prices saw consumer sentiment slipping in October. Given this situation, investing in defensive stocks like consumer staples and utilities would be a safe bet.

Five such stocks are American Water Works Company, Inc. AWK, Ameren Corporation AEE, Fortis, Inc. FTS, Unilever PLC UL and The Clorox Company CLX.

Mixed Inflation Moves in September

The Commerce Department reported last week that the consumer price index (CPI) rose 0.2% sequentially in September, matching August’s increase, but came in higher than analysts’ expectations of a rise of 0.1%.

On a year-over-year basis, CPI increased 2.4%, the smallest increase in over three and a half years. Core CPI, which excludes the volatile food and energy prices, jumped 3.3% year over year, higher than the consensus estimate of a rise of 3.2%.

The Fed announced a 50-basis point rate cut in its September FOMC meeting, the first since March 2020. The current benchmark policy rate is between 4.75% and 5%, the lowest since April 2023. Markets are hopeful that the Fed will go for another 25-basis-point rate cut in November.

However, Wall Street turned volatile following the release of the CPI data as concerns grew that the Fed could slow its pace of future rate cuts if inflation doesn’t decline substantially.

Consumer Sentiment Declines Weighing on Stocks

The University of Michigan's preliminary reading showed that consumer sentiment slipped to 68.9 in October from the final reading of 70.1 in the prior month. Economists had forecast a reading of 70.8.

Lingering high prices and fears of a slowing economy have been denting consumer sentiment from the highs seen a month earlier. The survey's reading of one-year inflation expectations jumped to 2.9% from 2.7% in the previous month.

Low-Beta Stocks to Play Safe

Given this scenario, investors should devise a plan centered around low-risk investments, emphasizing a blend of factors that maximize returns. Optimal strategies include investing in defensive stocks such as consumer staples and utilities, prioritizing stocks with low beta (ranging from 0 to 1), high dividend yields, and favorable 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 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 2.18%.