It’s been nine years since the U.S. central bank launched its quantitative easing program. Also, the U.S. stock market recently celebrated eight years of the bull run. That’s obviously not just a coincidence!
The Federal Reserve’s quantitative easing programs, initiated in December 2008, has played a major role in stimulating the U.S. economy. Apart from rescuing it from the ravages of the 2007-09 financial crisis that was marked with stock market downturns, foreclosures and prolonged unemployment, the boost in cheap liquidity from the rather unconventional monetary policy drove up stock and property markets, while bringing down bond yields. Today, the stock market indices are pushing further into record-high territories almost daily.
As consumer spending continues to grow on a recovering jobs market, low interest rates, strong U.S. dollar and cheaper fuel, the world’s largest economy may have more leg to run in 2017. However, even as we cheer the eighth birthday of the U.S. bull market, some investors are concerned that the conclusion of Fed’s unprecedented program of liquidity infusion might unnerve the market.
Fed’s Plans for Balance Sheet Normalization
With the Federal Reserve’s expansionary monetary policy providing the U.S. economy its much-needed impetus, the agency has now announced the beginning of the slow, long-drawn timetable to unwind its massive $4.5 trillion balance sheet. The Fed plans to commence the procedure in October with reductions of a modest $10 billion each month through December. The rate would then go up by $10 billion every quarter so as to reach a cap of $50 billion in October 2018. Also in the offing is another hike in the short-term interest rates, which could take place in December this year.
The tightening of the monetary policy usually preludes weak demand, contraction of corporate earnings and a possible stock market correction. While the potential negative drag from a strong dollar on overseas profits and geopolitical concerns regarding the North Korean regime remain key concerns, a rapid unwinding of Fed’s holdings is the last thing the U.S. economy needs.
Though the Fed intends to move slowly and cautiously toward shrinking its bloated balance sheet and higher interest rates, telegraphing their every move far in advance, the experience is still going to bring a lot of volatility to the markets. In particular, speculations surrounding the timing of the Fed’s interest rate rise may result in increased market volatility.
However, before you freak out and decide to steer clear of the stock market apprehending the ‘taper tantrum’ that lies ahead, you may want to reconsider.
Do Investors Need to Panic?
Even as Fed prepares to end its stimulus campaign, it will likely take quite some time to impact the economy. This means that the U.S. economy still has some time to benefit from cheap liquidity and low rates, which will continue to catalyze the bull run.
Fed officials have also made clear that they plan to decline balance sheet rates slowly and predictably enough to avoid hurting the expansion or killing the bull market. Thus, one can rule out the detrimental impact of a rapid unwinding on the financial markets.
And finally, withdrawing the quantitative easing stimulus is actually a by-product of rising economic growth and optimism. The expected ‘policy normalization’ simply indicates that the economy is ready for the tap to be turned off. Though higher interest rates raise the cost of debt capital, an expanding economy supersedes low-borrowing costs in the grand scheme of things.
And fortunately, economic strength would also buoy the overall stock market.
Play It Smart
Naturally, when the broader market sentiments have a predetermined positive direction, there is hardly any strategy as lucrative as growth investing. However, at a time when volatility may continue to unsettle the stock market, investors want to seek haven in safe income stocks.
When investors find themselves in such a tight spot, we believe that one of the smartest plays would be to go for mega-cap stocks (stocks with a market cap of around $100 billion or more) which still have high growth potential.
Mega-caps, usually the largest and most established companies in the stock market, have been around for a while. They tend to be stable, and many of them pay dividends based on their earnings. These companies enjoy leading market positions, have a global footprint, strong cash positions and are large enough to stay strong even in the face of unfavorable events.
Though mega-caps may not see the exponential returns that the small-caps sometimes achieve, they are equally less likely to see the big downturns frequently experienced by smaller companies. And with the current situation being unpredictable at best, you may not want to be lured by the expectant triple-digit returns (and end up losing money), but instead find a growth story in the relatively safer mega-cap stocks.
With the help of our new style score system, we have identified five mega-cap stocks with excellent growth potential. These stocks have a solid Zacks Rank as well.
Our Growth Style Score condenses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of its growth. Our research shows that stocks with Growth Style Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy), offer the best investment opportunities in the growth investing space. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
First on our list is HSBC Holdings plc (NYSE:HSBC). Headquartered in London, HSBC Holdings is a major global banking and financial services firm, with approximately $2.49 trillion in assets as of Jun 30, 2017. This Zacks Rank #1 stock, with a market cap of $193.7 billion, sports a Growth Score of A.
Toyota Motor Corp (NYSE:TM), another #1 Ranked stock, is our next pick. One of the leading automakers in the world in terms of sales and production, Japan-based Toyota has a Growth Score of B and a current market cap of $175.9 billion.
Then we have The Home Depot Inc. (NYSE:HD). Based on net sales, the company is the world’s largest home improvement specialty retailer with over 2,200 retail stores across the globe, offering a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, and related services. With a current market cap of roughly $186.7 billion, this #2 Ranked stock flaunts a Growth Score of A.
Our fourth choice is Boeing Company (NYSE:BA) — premier jet aircraft manufacturer and one of the largest defense contractors in the U.S. With a current market cap of roughly $147.2 billion, this stock with a Zacks Rank of 2 sports a Growth Score of A.
Finally, there is Bayer AG (OTCMKTS:BAYRY). Headquartered in Leverkusen, Germany, Bayer AG is a life science company with core competencies in the areas of health care and agriculture. This Zacks Rank #2 stock, with a market cap of $109 billion, sports a Growth Score of B.
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