After a tumultuous start to the year, the U.S. stock market finally turned green. It’s a striking revival for an index that had entered correction territory by mid February, with investors’ sentiments turning bearish.
Rise in oil prices from record lows and Fed Chair Janet Yellen’s dovish comments lifted the markets. However, the oil market is still fundamentally bleak as the massive supply glut continues to persist, which may eventually drag the markets down.
Yellen said that downside risks of a fall in oil prices along with weak Chinese economy continue to linger, compelling the Fed to tone down its rate hike expectations. Weak manufacturing and service sector data along with subdued consumer spending bolsters expectations that the Fed will refrain from raising rates in the coming months. There is another looming fear factor. Corporate earnings have turned negative for the first half of the year.
Since there is underlying weakness in the economy, it will be prudent to play safe by investing in dividend paying stocks. Moreover, the likelihood of rates not going up as fast as the markets once assumed has made dividend paying stocks more appealing.
Oil Climbs, Fundamentals Remain Weak
Crude oil had dropped below $27 a barrel in mid-February. But, since then, oil prices gained more than 40% ahead of the Apr 17 meeting in Doha where the Organization of the Petroleum Exporting Countries (OPEC) and Russia will discuss an output freeze aimed at boosting prices.
However, the question is whether this upswing will last. Investors continue to remain skittish as the global inventory level swells. Demand for oil, on the other hand, continues to lag in an already oversupplied market. In fact, a survey yesterday showed that output from the OPEC increased in March to 32.47 million barrels a day. Given this scenario, the meeting is not likely to do much to bolster prices.
Fed Knows How to Calm Markets
Fed Chair Janet Yellen reassured investors on Tuesday that she expects rate hikes to be gradual in the future, which mostly helped defensive stocks like utilities to soar in the last couple of days. Yellen’s statement has also made it certain that the Fed won’t hike rates in April. The Fed had kept rates unchanged in March.
Yellen expects rate hikes to be gradual as global risks could hurt the U.S. economy. These risks include oil and China. She remained worried that another drop in oil prices might lead to spending cuts by oil-driven countries and job losses in the energy sector. And as discussed above, it seems that the oil market isn’t out of the woods yet.
She was also concerned about China’s economic slowdown and the direction of its currency. Slowdown in the manufacturing sector and the export business taking a hit are dragging China down. Weakness in the Chinese economy resulted in a market meltdown at the beginning of the year when the Dow lost around 2,000 points.
Her statement also showed the lack of Fed’s confidence in the strength of the U.S. economy. It warned investors that the economy isn’t resilient enough to bear future increases in borrowing costs.
Lackluster Domestic Economic Data
Barring jobs data that painted a solid picture of the labor market in February and housing industry that remained firmer than what most believed, most other major data were discouraging. Manufacturers shrank their businesses in February for the fifth straight month, which remained a drag on the U.S. economy. The service sector also expanded slowly in February, with service providers remaining less optimistic about growth in the near future.
Add to this the drop in retail sales in February along with a sharp downward revision to January’s data and we know why there are serious issues about the economy’s growth predictions. Drop in retail sales indicated weakness in consumer spending levels. According to the Commerce Department, consumer spending barely rose in February as households cut back on goods purchases. These developments compelled banking-behemoth JPMorgan Chase & Co. (JPM- Analyst Report) to trim the first quarter growth to 1.2% compared to an earlier forecast of 2%.
5 Dividend Stocks to Buy Now
Markets have gained in the last one and a half months, thanks to a rebound in oil prices and Fed’s assurance to “proceed cautiously” when it comes to raising rates. Even as the Fed pulled out its best pain reliever, it indicated that the U.S. economy isn’t strong enough to sustain the implications of increasing borrowing costs. If we look at the manufacturing, service and consumer spending space, the picture is gloomy. Hopes for earnings growth this year also look slim.
Moreover, the world still has more oil supply than it needs, raising doubts as to how much oil prices will rise in the future. Given these uncertainties, it will be wise for investors to search for some stability in their portfolios. This calls for investing in dividend stocks. Such stocks reflect a solid financial structure and healthy underlying fundamentals. Moreover, the possibility of a rate hike ebbing in the near term makes dividend paying stocks more alluring.
Dividend stocks when combined with a Zacks Rank #1 (Strong Buy) are expected to boost your returns. The favorable Zacks Rank should help these stocks to continue gaining this year as well.
CenturyLink, Inc. (CTL - Analyst Report) provides various communications services to residential, business, wholesale and governmental customers in the U.S. The company is headquartered in Monroe, LA. CTL carries a Zacks Rank #1 and offers a promising dividend yield of 6.78%.
Darden Restaurants, Inc. (DRI - Analyst Report) through its subsidiaries owns and operates full-service restaurants in the United States and Canada. The company is headquartered in Orlando, FL. DRI carries a Zacks Rank #1 and offers an encouraging dividend yield of 3%.
Cincinnati Financial Corp. (CINF - Analyst Report) engages in the property casualty insurance business in the U.S. The company is headquartered in Fairfield, OH. CINF carries a Zacks Rank #1 and offers a stable dividend yield of 2.9%.
Motorola Solutions, Inc. (MSI - Analyst Report) is engaged in providing communication equipment, software and services across the world including the U.S. The company is headquartered in Schaumburg, IL. MSI carries a Zacks Rank #1 and offers a steady dividend yield of 2.19%.
Campbell Soup Co. (CPB - Analyst Report) along with its subsidiaries manufactures and markets convenience food products. The company is headquartered in Camden, NJ. CPB carries a Zacks Rank #1 and offers a stable dividend yield of 1.95%.
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