Markets experienced their best month in more than two years in February, right after a particularly tough January. Strong earnings numbers and deal news helped benchmarks notch up record gains.
Meanwhile, international tensions reduced following a successful conclusion to Greece’s debt talks. Domestic economic data was mixed with GDP numbers coming in below par. However, they had little impact on the stocks. Oil prices continued to move downward but also had a limited impact on markets’ gains.
February’s Performance
For the month, the S&P 500 gained 5.5%, its best monthly gain since Oct 2011. The Dow gained 5.6%, its best monthly gain since Jan 2013. The Nasdaq posted a monthly gain of 7.1%. Benchmarks settled in the green for the month after an agreement on Greece’s bailout program boosted investor sentiment. Nasdaq had ended in the green for 10 consecutive days, a record winning streak since Jul 2009.
Encouraging earnings results and bullish deal news from prominent companies had a positive impact on investor sentiment. Meanwhile, Fed Chair Janet Yellen’s semiannual testimony to Congress has put to rest near-term rate hike fears. Fed funds futures now suggest that a rate hike may occur only in the latter half of the year. CME Group data puts the possibility of an increase at 83% for December.
Slump in Oil Prices
Oil prices moved upward during the first week of the month, due to a number of factors. Subsequently, prices resumed their downward slide. Reports from the U.S. Energy Information Administration (EIA) were responsible for declines on some occasions. EIA kept its outlook for U.S. crude production in 2015 almost flat. Moreover, it projected that U.S. crude oil production may reach 1970’s highest annual average level of 9.6 million bpd in 2016.
Weekly crude oil inventories reported by the EIA grew steadily over the month. The EIA reported that U.S. commercial crude oil inventories rose 8.4 million barrels in the week ending Feb 20 to 434.1 million. This is the highest level of inventories witnessed in last 80 years.
The only sharp increase in prices later in the month came after Ali al-Naimi, Saudi Arabia’s oil minister, said oil demand is rising and oil market seems to be “calm now.” Oil prices moved north on the month’s last trading day, banking on improving demand outlook and supply disruptions.
Signs of European Recovery
Eurozone’s fourth quarter GDP rose 0.3%, better than the estimated 0.2% gain. Fourth-quarter growth was led by Germany, which reported growth of 0.7%. This was more than twice the projected 0.3% increase. Spain also reported 0.7% growth, boosted by cheaper oil which lifted consumer spending.
Additionally, Markit’s preliminary survey report showed that business activity is recovering in the common currency bloc. The index that measures the growth of private-sector activity increased to its highest level in seven months. Investors remained optimistic about the recovery of Eurozone’s economy as the ECB’s confidence-boosting QE program gets going next month.
Crisis in Greece
Negotiations between Greece and its creditors continued through the month. Concerns over a final breakdown in talks and a “Grexit” dampened investor enthusiasm to some extent. The month began on a tense note after the ECB cancelled its acceptance of junk-rated Greek government debts as security for regular central bank loans.
Later in the month, Germany dismissed Greece’s plea for bridge funding until the end of May, which would have given the country some time to negotiate new bailout conditions. Europe’s economic powerhouse also rejected Greece’s request for a six-month extension of the country’s loan agreement program.
Ultimately, Greece’s finance minister, Yanis Varoufakis and other Eurozone’s officials struck a deal regarding Greece’s bailout program. According to the deal, the creditors decided to give an extension of four months to Greece in order to settle a bailout of 240 billion euros. Investors welcomed the news as the agreement reduced the possibility of “Grexit,” at least for some time.
Disappointing GDP Data
GDP increased at an annual rate of 2.2%, less than the “advance” estimate of a rise by 2.6%. However, this rise in fourth quarter GDP was more than the consensus estimate of an increase by 2%. The third quarter growth in real GDP was 5%.
Decrease in business and government spending along with trade gap resulted in downward revision in the fourth quarter GDP. Business inventories also came in lower than government’s previous report. However, real personal consumption expenditure accelerated at its fastest pace since early 2006.
Labor Market Improves
The U.S. economy created 257,000 new jobs in January, the 11th consecutive month in which the economy generated more than 200,000 jobs, its longest such stretch since 1994. Additionally, the average hourly earnings increased 0.5%, or 12 cents, to $24.75 in January. Year-on-year growth in average hourly wages came in at 2.2% in January.
Meanwhile, the unemployment rate increased marginally to 5.7% in January from December’s rate of 5.6%, mainly due to rise in labor participation rate. The retail trade sector emerged as the biggest recruiter in January as the sector added 46,000 new jobs.
Mixed Domestic Data
Other economic reports for the month were mixed in nature. Among the positives, domestic-made vehicle sales climbed to an annualized rate of 13.5 million. Industrial production rose 0.2% in January while durable goods experienced their biggest gain in six months.
Meanwhile, the Conference Board’s leading economic index increased 0.2% in January. Additionally, Markit’s PMI index for the U.S. rose to 54.3 in February from 53.9 in January. Markit’s flash PMI for the U.S. services sector reached its highest level since October.
However, factory orders and ISM Manufacturing Index numbers were disappointing. Retail sales declined while consumer spending in December registered its biggest drop since 2009. Consumer confidence dropped to a three-month low in February.
Data on housing indicated that the sectoral recovery was slowing. The S&P/Case Shiller composite index of 20 metropolitan cities rose 4.5% year on year in December. Existing home sales slumped to a nine-month low during January. Additionally, new home sales slipped marginally. However, the Pending Home Sales Index increased to its highest level since Aug 2013.
Encouraging Earnings Numbers, Deal News
Encouraging earnings results from Cisco Systems, Inc. CSCO, Pepsico, Inc. PEP, The Coca-Cola Co. KO, Medtronic plc MDT, Hormel Foods Corp. HRL, T-Mobile US, Inc. TMUS, The Walt Disney Co. DIS, General Motors Co. GM and The Estée Lauder Companies Inc. EL helped markets register solid gains.
Merger and acquisition (M&A) news also helped markets moved upward. Staples, Inc. SPLS agreed to acquire Office Depot, Inc. ODP for $6.3 billion. Pfizer Inc. PFE agreed to acquire Hospira Inc. HSP in an all-cash deal valued at $16 billion.
Valeant Pharmaceuticals International, Inc. VRX acquired Salix Pharmaceuticals Ltd. SLXP for $10 billion in cash. Also, Bristol-Myers Squibb Co. BMY agreed to buy privately-owned biotechnology company Flexus Biosciences.
Yellen’s Congressional Testimony
Federal Reserve chairwoman Janet Yellen said in her Congressional testimony that the Fed will decide on a rate hike "on a meeting-by-meeting basis." She also reconfirmed that the Fed will evaluate economic conditions before considering a rate hike. Additionally, Yellen stated that dropping the word "patient" from the Federal Open Market Committee’s (FOMC) statements does not imply that the Fed will raise interest rate immediately.
Janet Yellen provided a near similar testimony before the House Financial Services Committee. Over the last two days, she added that the Fed will consider a rate hike when it feels "reasonably confident that inflation will move back over the medium term toward our 2 percent objective." Additionally, Yellen stated that dropping the word "patient" from the Federal Open Market Committee’s (FOMC) statements does not imply that the Fed will raise interest rate immediately.
She also stated the economy is growing at a steady pace with a rapid decline in unemployment rate and impressive recovery in labor market. Yellen also mentioned that the economy has witnessed a monthly average of 280,000 jobs additions in 2015. However, she also said that some areas of the economy still remain weak. This includes slow growth in housing sector and sluggish wage growth. She added that slump in oil prices is one of the main reasons behind low inflation rate.
3 Star Performers for February
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 11 that made it through this screen:
Mattson Technology Inc. MTSN is a designer, manufacturer and marketer of semiconductor wafer processing equipment used to fabricate integrated circuits across the world. Mattson Technology provides rapid thermal processing, etch and dry strip equipment to semiconductor companies.
Price gain over the last 4 weeks = 38.6%
Expected earnings growth for current year = 117.9%
Mattson Technology holds a Zacks Rank #2 (Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.67.
Rocky Brands, Inc. RCKY is a designer, manufacturer and marketer of footwear and apparel. Rocky owns the Lehigh, Michelin, Durango, Creative Recreation and Durango brands. The company has offerings for workers in the construction and hospitality sectors. It also makes footwear for police, security and postal employees.
Price gain over the last 4 weeks = 37.6%
Expected earnings growth for current year = 20%
Rocky Brands holds a Zacks Rank #1 (Strong Buy) and has a P/E (F1) of 12.74x.
ON Semiconductor Corp. ONNN is an original equipment manufacturer (OEM) of a broad range of discrete and embedded semiconductor components. The company produces discrete, power management, logic, signal processing and custom products.
Price gain over the last 4 weeks = 27.1%
Expected earnings growth for current year = 23.4%
Apart from a Zacks Rank #2 (Buy), ON Semiconductor has a P/E (F1) of 13.77x.
Good Times to Continue?
Stocks have returned to their winning ways this month, riding on the back of strong earnings and mergers and acquisitions. International headwinds have also abated with a satisfactory conclusion to Greece debt negotiations. However, the domestic economic picture is far from satisfactory.
Several crucial economic reports have been disappointing. Though the labor market has made a strong recovery, the resurgence in housing has slowed. The Fed Chair has reacted to these indicators that it will increase rates taking into consideration all economic indicators. This has dispelled market fears of a rate hike in the near future. In the absence of significantly strong economic headwinds, it is likely that stocks may continue to notch up gains in the near future.
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