Invest In Merck As Union Strike & Interest Hike Cont'd?
I think the US market might trend mixed or higher today despite the labour union strike continues into its 3rd day.
US market last week’s performance was all over the place in particular on Fri, 15 Sep.
By the time market closed:
DJIA: -0.83% (-288.87 to 34,618.24). Dow has dipped marginally -0.09% lower last week.
S&P 500: -1.22% (-54.78 to 4,450.32). Index has fallen -0.68% lower last week.
Nasdaq: -1.56% (-217.22 to 13,708.33). Index has inched -1.27% lower last week.
While a lot of posts tried to pin down Friday dismal performance due to this reason or that — I think it’s because it was Quadruple Witching Day.
For the unfamiliar:
With it out of the way (until December 2023), focus returns to:
United Auto Workers union strike that has started on Fri, 15 Sep 2023.
FOMC meeting starting tomorrow and into Wed, 20 Sep 2023.
UAW Strike & Its Insidious Effects
The United Auto Workers (UAW) union strike has sent shockwaves across the automotive industry.
It is the largest strike t in the sector since 1976.
Demands included [a] a 36% pay increase across a four-year contract, [b] pension benefits for all employees; [c] limited use of temporary workers; [d] more paid time off, including a four-day workweek; and [e] more job protections, including the right to strike over plant closings.
The strike disrupted the production and supply of vehicles, parts and components, not only for the 3 major automakers, but also their suppliers, dealers and customers.
It will have a significant impact on the US stock market overall, as the automotive industry accounts for about 3% of the US GDP and employs >one million people directly and indirectly.
It will hurt consumer confidence and spending, as well as business investment and trade.
The longer the strike, the more severe the consequences will be for the US economy and the stock market.
FOMC Meeting And Interest Hike
Market would trade within boundaries until it is officially announced that interest hike will be paused for September 2023.
Most recent official data should leave the Fed encouraged by ongoing disinflation, concerns about re-acceleration in inflation cannot be discounted due to rising oil price.
Last week, oil has broken through the $90 per barrel resistant level.
Hypothetically, even if the Fed decides to [a] keep interest at the current rate until end 2023 and [b] hold the elevated interest rate into 2024 — will these 2 non-action actions cause the US economy to slip into recession?
To have a sense, we could look at US bonds 10-year and 3-month yield curve.
What is a Yield Curve? It is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates.
Most frequently reported yield curve compares the 3-month, 2-year, 5-year, 10-year, and 30-year US Treasury debt.
A normal yield curve shows: (see above)
Low yields for shorter-maturity bonds.
Then increases for bonds with a longer maturity, sloping upwards.
US Bonds - 10 Years, 3 Months Yield Curve.
An inverted yield curve means the 3-month bond has a higher interest rate than the 10-year bond.
It is a market anomaly, suggesting a period of economic weakness is imminent.
According to Bloomberg's data, the 10-year and 3-month yield curve has been inverted for 212 trading days or 7.06 months.
The latest 212 days is a new “record” that has surpassed the 1980 inversion and is the longest stretch since at least 1962.
Expected weakness is partially due to the fact that banks have little incentive to lend when short-term interest rates remains elevated.
Current inversion is unique because it is driven by a Fed that is focused on taming inflation amid a period of solid economic growth.
This begs the question — whether the latest inversion could be the first (on record) that fails to predict a recession, especially if the Fed declares victory on inflation and cut interest rates to levels that are still above the neutral rate of 2.5%.
In a July interview, President of Yardeni Research - Ed Yardeni interpreted the inverted yield curve as "[a] the Fed has managed to bring inflation down, [b] with a resilient US economy and [c] may not have to raise rates much higher".
Goldman Sachs is of the same opinion too.
In a CNN post, dated 05 Sep 2023, they have further downgraded the probability of US slipping into recession to a mere 15% (see above).
The lingering “threat” confronting investors is the “lagged effect” of the Fed’s interest hikes on the economy.
Based on history, in 1980 previous yield curve inversions lasted as long as 18 months before recessions hit the US.
As recent as July 2006, when the yield curve inverted, recession didn't happen until 15 months later, in December 2007.
In summary, even though current-resilient US economy may have cast doubts on the reliability of the yield curve inversion signal’s, the economy is NOT out of the woods yet.
If and when US slips into recession (mild or otherwise), what are the possible “resilient” stock/s to park for investment?
According to Forbes Advisor, they are: (for reference only)
(1) $Merck(MRK)$ :
This pharmaceutical company has a dividend yield of 2.7%.
It also has a respectable 5-year forward growth estimate of 10.8%.
Merck has a strong portfolio of drugs & vaccines, making the company less vulnerable to economic downturns.
(2) $Becton Dickinson(BDX)$ :
This medical technology company has a dividend yield of 1.3%.
Similarly, it has a healthy 5-year forward growth estimate of 9.6%.
Company’s products are essential for healthcare providers, which makes it less susceptible to economic cycles.
(3) $Pepsi(PEP)$ :
This food and beverage company has a dividend yield of 2.8%.
For its 5-year forward growth estimate, it stands at 8.5% - not too shabby.
PepsiCo’s products are considered consumer staples, that means they are in demand regardless of the economic situation.
(4) $CMS Energy Corp(CMS)$ :
Energy company has a dividend yield of 3.5%.
And a 5-year forward growth estimate of 7.8%.
As a “state” provider of utilities like electricity & natural gas services to customers in Michigan, this makes it less vulnerable to economic cycles.
This scientific research company has a dividend yield of 0.3%.
Its 5-year forward growth estimate stands at 7.1%.
As company provides essential laboratory equipment and services to healthcare providers and researchers, this makes it less susceptible to economic cycles.
It is never too late to start monitoring, in preparation for a possibly rainy day - right.
Do you think the Labour Union strike will damage the US economy and US stock market?
Do you think you will start to look for “defensive” stocks just in case recession becomes imminent?
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