Markets experienced a difficult month with all benchmarks closing in the red. Global economic concerns and a continual slump in fuel prices emerged as the major headwinds for stocks. The political situation in Greece also weighed on investor sentiment.
Stimulus measures from the ECB and encouraging comments from the Federal Reserve improved the situation somewhat. However, economic data on the domestic front was also largely disappointing.
January’s Performance
For the month, the S&P 500, the Dow and the Nasdaq dropped 3.1%, 3.7% and 2.1%, respectively. In January, the World Bank reduced its global economic growth outlook for 2015 and 2016. Continuous plunge in oil prices also dampened investor confidence. Political uncertainty in Greece and Bill Gross’ dismal outlook for 2015 have dented investors' moods. Dismal economic data including ISM Services Index and factory order added to the bearish sentiment.
Disappointing fourth quarter earnings results from banking majors also had a negative impact on investor sentiment. Meanwhile, investors assessed the consequences that markets may face after Swiss National Bank dropped its long-standing exchange rate of the Swiss franc against euro. Separately, the European Central Bank (ECB) announced a large-scale bond buying program to revive the near-stagnant Eurozone economy.
Slump in Oil Prices
Early last month, U.S. oil prices slipped below the $50.00/bbl level for the first time in more than five years. Abundant supply of oil and strength in dollar were cited as the reasons behind this renewed slump in crude oil prices. Rise in output from key producers including Russia and Iraq came in at a time when analysts have cut their demand outlook due to weak global economic scenario.
Later in January, The Goldman Sachs Group, Inc. (GS) reduced its three-month outlook for the price of WTI crude oil. Also, the company downgraded its outlook for the price of Brent crude oil. Major oil suppliers showed no sign of reducing oil production, which in turn had a negative impact on the energy prices.
Oil prices declined again after the Organization of Petroleum Exporting Countries (OPEC) slashed its demand for oil estimates for the next year. Meanwhile, Saudi Arabia's oil minister had turned down the need for output cut. Oil prices took another beating after inventory supply touched its highest level in eight decades.
Global Growth Worries
The World Bank reduced its global economic growth outlook for 2015 and the next year. It now expects global GDP to grow at a pace of 3% in 2015, compared to previously projected rate of 3.4% growth.
Additionally, IMF made the steepest cut to the world growth forecast in three years. IMF now sees global growth at 3.5% in 2015, down from previous projection of 3.8%.
Separately, China reported GDP growth of 7.4% in 2014, slowest since the 3.8% growth registered in 1990. Growth was also down from 7.7% in 2013.
Swiss Bank, Bank of Canada Act
The Swiss National Bank (SNB) decided to remove its three-year old policy of maintaining minimum exchange rate of 1.20 Swiss francs to 1 euro. Following the announcement, Swiss franc jumped against the euro and the dollar. In recent times, Swiss franc was facing huge pressure due to this minimum exchange rate policy. This is because euro was becoming weaker against major currencies due to sluggish economic conditions in the Eurozone.
Meanwhile, the Bank of Canada’s surprise rate cut added to the bullish sentiment. The Bank of Canada trimmed its interest rate by 25 basis points to 0.75% due to continuous slump in oil prices. The bank said plunge in crude oil prices are “unambiguously negative” for its economy.
ECB Announces Stimulus
The ECB announced a larger than expected stimulus plan to boost Eurozone’s fragile economy. ECB President Mario Draghi said the bank will buy 60 billion euros a month in assets including both government and private sector bonds, and securities issued by European organizations. The bond-buying program will begin in March and is expected to continue at least till Sep 2016.
Draghi said the asset purchasing program could extend further provided ECB fails to meet its inflation target of just below 2%. ECB’s announcement of aggressive bound-buying program weighed on the euro. The euro weakened against the dollar. A stronger dollar in turn adversely affected dollar-denominated currencies including crude oil.
Crisis in Greece
The political situation in Greece worsened in December last year after then Prime Minister Antonis Samaras announced presidential elections. At the end of the month, the country’s parliament rejected Antonis Samaras’ preferred presidential candidate in a third and final vote. Subsequently, Antonis Samaras called for a snap election.
Ultimately, Greece’s Syriza party won the country’s general elections. The election result raised worries about Greece’s exit from the Eurozone. This is because Syriza’s leader Alexis Tsipras said that the victory meant the end of the “viscious cycle of austerity.”
In latest developments, Greece’s finance minister Yanis Varoufakis rejected the country’s extended bailout program. Yanis Varoufakis also refused to co-operate with the European Union and the International Monetary Fund.
Labor Market Improves
Encouraging employment data was a major positive on the domestic front. The national employment report from Automatic Data Processing, Inc. (ADP) showed private sector hiring improved in December. The report stated 241,000 private jobs were added in December.
Meanwhile, unemployment rate declined to 5.6% in December from 5.8% in November. Moreover, it was reported the economy added 252,000 new jobs in December. Overall for 2014, 2.9 million jobs were added. This is the strongest year for jobs growth since 1999.
Dismal Domestic Data
However, average hourly earnings contracted 0.2% in December, contrary to the consensus estimate of 0.2% rise. This contraction in wage growth also had a negative impact on labor force participation rate. Civilian labor force participation rate declined 0.2% to 62.7% in December.
This was part of a series of disappointing economic reports released in January. The ISM Services Index declined while durable orders decreased in November, Additionally, the flash Markit manufacturing purchasing managers index posted its worst reading in a year.
Retail sales declined 0.9% in December, the biggest drop since Jan 2014. Moreover, the Producer Price Index declined 0.3% in December, witnessing biggest drop in December in around three years.
U.S. homebuilders’ confidence moved down in January. Pending Home Sales Index declined the most since Dec 2013. Existing home sales gained in December but declined 3.5% year-over-year.
Factory orders and industrial production numbers were also dismal in nature. Advance estimate revealed that fourth quarter GDP increased at an annual rate of 2.6%, less than the consensus estimate of an increase by 3.6%.
Earnings Numbers
Fourth quarter earnings were hit by three interconnected headwinds – oil, the U.S. dollar and global economic growth. The three largest banks, JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Citigroup (C) posted their worst combined quarterly revenues this earnings season since 2011 due to a combined 23% drop in their fixed-income, currency and commodity segments. Morgan Stanley (MS) also posted discouraging quarterly results.
IBM Corp. (IBM), Google (GOOG), Microsoft (MSFT) also posted weak quarterly numbers. However other tech stocks fared better, with Netflix, Inc. (NFLX) and Facebook, Inc. (FB) comfortably surpassing estimates. Apple Inc. (AAPL) was the star performer, emerging unscathed to post record earnings of roughly $18 billion in fiscal first-quarter 2015. The Dow Chemical Company (DOW), Ford Motor Co. (F) and The Boeing Company (BA) also posted encouraging quarterly numbers.
FOMC Minutes, Policy Statement
Minutes of the Federal Open Market Committee noted that they “would want to be reasonably confident that inflation will move back toward 2% over time.” Officials believe inflation rate won’t climb to Fed’s 2% target for some time due to lower energy prices and stronger dollar. The central bank could raise key interest rates even with low inflation, but not before April
Later in the month, the Federal Reserve offered a dovish picture of economic growth and labor market in its policy statement. Moreover, the Fed also restated the phrase “patient” regarding interest rate hike. The Fed said that they will consider "financial and international developments" before raising key interest rates. It indicated that rate hike may not come sooner than mid-2015.
3 Star Performers for January
I ran a screen on Research Wizard for companies with the following parameters:
(Click here to sign up for a free trial to the Research Wizard today):
- Percentage price change over the last 4 weeks greater than or equal to 15%
- Forward price-to-earnings Ratio (P/E) for the current financial year (F1) less than or equal to 20. This picks out stocks that are good value choices
- Expected earnings growth for the current financial year greater than or equal to 20%
- Zacks Rank less than or equal to 2: This ascertains stocks that have shown above-average returns over the last 26 years.
(See the performance of Zacks’ portfolios and strategies here: About Zacks Performance).
Here are the top 3 stocks among the 10 that made it through this screen:
Freescale Semiconductor, Ltd. (FSL) offers embedded processing solutions on a global basis. These solutions are provided to clients in the automotive, networking, industrial and consumer segments. Products offered by the Company include networking and multimedia microprocessors. .
Price gain over the last 4 weeks = 27.2%
Expected earnings growth for current year = 40.3%
Freescale Semiconductor holds a Zacks Rank #1 (Strong Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.07.
Allegiant Travel Company (ALGT) is focused on linking travelers in small cities of the U.S. The company provides air travel through a fixed number of nonstop flights between world-class leisure and small cities.
Price gain over the last 4 weeks = 20.6%
Expected earnings growth for current year = 61.9%
Allegiant Travel holds a Zacks Rank #1 (Strong Buy) and has a P/E (F1) of 17.58.
National American University Holdings, Inc. (NAUH) owns and operates National American University, a regionally accredited, for-profit institution of higher learning. The National American University, using both campus-based and online instruction, provides associate, bachelor's and master's degree and diploma programs in business-related disciplines
Price gain over the last 4 weeks = 18.5%
Expected earnings growth for current year = 67.9%
Apart from a Zacks Rank #2 (Buy), National American University Holdings has a P/E (F1) of 13.62.
Tough Times to Continue?
Last month has been a particularly difficult one for stocks. However, 2013 also experienced a recovery in February after a particularly tough January. At the same time, there are several lingering headwinds which may continue to weigh on stocks going ahead. Global growth worries may have been counteracted to some extent by ECB’s monetary stimulus measures. However, oil prices continue to move south and no respite seems to be forthcoming in the near future.
These factors have also impacted earnings numbers. On the domestic front, economic data has been largely disappointing. The advance estimate for fourth quarter data signifies a possible cooling down of the economy at the end of the year. Given the different forces weighing on stocks, indications on the domestic front may provide much needed respite to markets going forward. Any positive developments on this front will provide stocks with impetus going forward.
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