Trade Tensions Simmer: 5 Service Stocks to Buy Now

The Chinese government recently threatened to retaliate if President Trump follows through his plans to impose additional tariffs on Chinese imports. Meanwhile, Trump claims China ‘broke the deal’. This led investors to believe that trade talks between the countries are on the brink of collapse.

China’s trade issues have now rattled markets. But, what do you buy in a trade war? Simply, invest in service firms as they are less exposed to any trade policy and their strong fundamentals insulate them from any tariff-induced volatility.

How Did Wall Street Fare?

U.S. stocks went on a roller-coaster ride on May 8. The Dow did manage to end in the green, but just barely. The blue-chip index went up 0.01%. The Dow, by the way, had already suffered its largest percentage decline on May 7 since Jan 3.

After spending much of the day in the positive territory, the broader S&P 500 regrettably declined 0.2%, while the tech-laden Nasdaq dropped 0.3%. Both the bourses had seen their biggest daily drop on May 7 since Mar 22.

The Cboe Volatility Index (VIX), referred to as Wall Street’s fear gauge, has mostly been calm since the start of this year. But now, it is moving up and is on track for its biggest monthly gain. This index of expected volatility for the S&P 500 over the coming 30-day period had already touched an intraday high on May 7. The VIX is now up 61%, since a 75% jump last October.

Trade Uncertainty Keeps Wall Street on Toes

Uncertainty over the Sino-American trade talks led to a rocky trading session. Stocks did turn green after White House Press Secretary Sarah Sanders told reporters that Beijing is willing to make a trade deal with the United States. But, stocks slipped on reports that China is considering counter-measures for Trump’s latest tariffs.

Even though China’s top trade negotiator, Vice Premier Liu He, is expected to participate in talks this week with Robert Lighthizer and Treasury Secretary Steven Mnuchin, the Chinese Commerce Ministry said that “the escalation of trade friction is not in the interests of the people of the two countries and the people of the world.” After all, a trade war will hamper economic growth and eventually squeeze corporate profits.

Lest we forget, Trump recently escalated the trade war by announcing that the tariffs imposed on $200 billion worth of Chinese goods will be increased from 10% to 25%. In fact, he has threatened to levy tariffs on all Chinese goods with America. And this means imposing tariffs on the remaining $325-billion Chinese goods. His moves will invariably affect more than 5,000 China-made products, including fresh and frozen foods, chemicals, textiles, metalwork, building materials, electronics and consumer goods.

Trump upended months of encouraging reports that the United States and China are making substantial progress in trade-related issues. While protection of intellectual property rights continues to be a bone of contention for the economies, Trump is desperate to bridge the difference between imports and exports in order to boost the manufacturing sector.

How to Play This Trade Ambiguity?

Service firms are safe bets for those who are wondering where to invest. This is because such firms are unperturbed by trade retaliations as they have less foreign sales exposure compared to goods companies. Service stocks also have less foreign input cost that might be subject to tariffs. Such input costs mostly include direct materials, labor and factory overheads.

Some may argue that growth in the service sector, the main component of the U.S. economy, slowed for the second straight month in April. And rightly so! The ISM nonmanufacturing index came in at 55.5 in April, compared to 56.1 in March. But let’s admit that the current level is still above 50, indicating expansion and not shrinkage. At the same time, job gains in the service sector continued to improve in April, whereas job gains in the manufacturing sector were low for the third straight month.

5 Solid Choices

We have, thus, selected five solid service stocks that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.