Markets witnessed choppy trading sessions during Q1 2015 as investors grappled with concerns related to lower global growth projections, a slump in oil prices, strengthening dollar and apprehensions about the timing of the Fed interest rate hike. The World Bank reduced its global economic growth outlook for 2015 and 2016.
The Dow snapped a three-quarter winning streak and declined 0.3%. The blue-chip index dropped at least 1% for nine days during the quarter, the most number of days to end in the red since second quarter 2012.
However, the S&P 500 gained 0.4% and extended its quarterly winning streak to nine quarters. This is its longest stretch of quarterly gains since 1998. The Nasdaq advanced 3.5%, also extending its winning streak to nine quarters, its longest stretch of quarterly gains ever.
Monthly Performance & Events
March
For the month, the S&P 500, the Dow and the Nasdaq declined 1.7%, 2% and 1.3%, respectively. Investors remained concerned about multinationals’ first quarter earnings results due to the strengthening U.S. dollar. Additionally, the crisis in the Middle-East following an air strike in Yemen dampened investor sentiment.
Deal News, Earnings Results
Developments about deals dominated the month. Encouraging deal news such as the one involving Hewlett-Packard Company HPQ and Aruba Networks, Inc. ARUN boosted markets.
Encouraging earnings results such as Nike, Inc. NKE while dismal results from the likes of FedEx Corp. FDX a negative impact on the benchmarks.
Economic Data
According to the third estimate, GDP increased at an annual rate of 2.2%, less than the consensus estimate of a 2.4% increase. The report on the fourth quarter GDP remained unchanged when compared to the "second" estimate issued last month.
Meanwhile, the U.S. economy created a total of 295,000 jobs in February, beating the consensus estimate of 235,000. Unemployment rate went down to six and a half year low of 5.5% in February.
However, a flurry of dismal economic data including the ISM Manufacturing Index, durable orders, factory orders, housing starts, construction spending and personal consumption expenditure dented investor sentiment.
Fed Comments
In a unanimous vote, Fed officials dropped the “patient” phrase from the policy statement, indicating a possible rate hike in the next couple of months. The central bank noted that a rate hike was “unlikely” in April and cautioned that it will only hike rates if the labor market improves further and the inflation target is achieved “over the medium term.”
At a conference sponsored by the San Francisco Fed, Yellen added she and other FOMC members believe a “gradual rise in the federal funds rate” would be the correct approach “over the next few years.”
Dollar Volatility
The dollar weakened on the heels of the Federal Open Market Committee’s (FOMC) statement, losing 3% against the euro, its biggest weekly loss against the currency in three years. This was in sharp contrast to the greenback’s surge over the month. Fluctuations in the value of the U.S. dollar have weighed on investor sentiment.
The dollar had touched a 12-year high against the euro by the second week of the month. The euro plunge intensified with the commencement of the ECB’s monetary easing program and expectations of the US Fed hiking rates. Overall, the dollar increased nearly 7.8% during the quarter against major currencies.
Oil Prices
Oil prices declined over the month, weighing on energy stocks. During the first week of the month, oil prices declined, spooked by the Energy Department's latest inventory release. During the second week, crude prices fell to their lowest level in 1½ months, following bearish comments from the International Energy Agency (IEA).
Prices rebounded during the third week, after the U.S. dollar took a hit in response to the Fed announcement. Oil prices gained again during the last week on fears of growing Middle Eastern instability over the civil war in Yemen.
February
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 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.
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. EIA kept its outlook for U.S. crude production in 2015 almost flat. It also projected U.S. crude oil production may reach 1970’s highest annual average level of 9.6 million bpd in 2016.
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.”
Signs of European Recovery
Eurozone’s fourth quarter GDP rose 0.3%, better than the estimated 0.2% gain. Growth was led by Germany, which reported growth of 0.7%. This was more than twice the projected 0.3% increase.
Additionally, Markit’s preliminary survey report showed that business activity is recovering in the common currency bloc. The index increased to its highest level in seven months.
Crisis in Greece
Concerns over a final breakdown in talks and a “Grexit” ("Greek exit") 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.
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.
Mixed Domestic Data
GDP increased at an annual rate of 2.2%, less than the “advance” estimate of a rise by 2.6%. Third quarter growth in real GDP was 5%.
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. Meanwhile, the unemployment rate increased marginally to 5.7% in January.
Reports on domestic vehicle sales, industrial production and durable goods were encouraging. However, factory orders and ISM Manufacturing Index numbers were disappointing. Retail sales declined and consumer spending in December slumped. Data on housing indicated that the sectoral recovery was slowing.
Encouraging Earnings Numbers, Deal News
Encouraging earnings results from Cisco Systems, Inc. CSCO, The Coca-Cola Company KO, The Walt Disney Company DIS and General Motors Company GM helped markets register solid gains.
Merger and acquisition (M&A) news also helped markets moved upward. Pfizer Inc. PFE agreed to acquire Hospira Inc. HSP in an all-cash deal valued at $16 billion.
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." 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. Yellen said 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."
January
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 dented investor mood. Dismal economic data including ISM Services Index and factory order added to the bearish sentiment.
Slump in Oil Prices
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.
Oil prices declined again after the Organization of Petroleum Exporting Countries (OPEC) slashed its demand for oil estimates for the next year. Oil prices took another beating after inventory supply touched its highest level in eight decades.
ECB Announces Stimulus
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, which weakened against the dollar.
Labor Market Improves, Other Data Disappoints
Encouraging employment data was a major positive on the domestic front. 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.
On the other hand, ISM Services Index and durable orders data was disappointing, Retail sales declined 0.9% while PPI declined 0.3% in December. Housing data was uniformly dismal in nature.
Factory orders and industrial production numbers were also disappointing. 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 posted their worst combined quarterly revenues this earnings season since 2011.
IBM Corp. IBM, Google GOOGL, Microsoft MSFT also posted weak quarterly numbers. However, Apple Inc. AAPL posted record earnings of roughly $18 billion in fiscal first-quarter 2015.
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 won’t climb to the Fed’s 2% target for some time due to lower energy prices and a stronger dollar.
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.
3 Star Performers for Q1 2015
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 12 weeks greater than or equal to 25%
- 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 3 stocks that made it through this screen:
Lannett Company, Inc. LCI is a developer, manufacturer and distributor of pharmaceutical products sold under generic names. In addition, the company’s Cody Laboratories subsidiary produces active pharmaceutical ingredients.
Lannett Company has gained 57.9% over the last 12 weeks. It carries a P/E ratio of 16.86 and the current year estimated earnings growth is 102.9%. The company currently carries a Zacks Rank #1 (Strong Buy).
Mallinckrodt Public Ltd. MNK is a specialty biopharmaceutical and medical imaging business company. It develops, manufactures, markets and distributes both branded and specialty generic pharmaceuticals, active pharmaceutical ingredients (API) and diagnostic imaging agents in approximately 65 countries.
Mallinckrodt has gained 27.9% over the last 12 weeks. It carries a P/E ratio of 17.23 and the current year estimated earnings growth is 48.8%. The company currently carries a Zacks Rank #1 (Strong Buy).
Avago Technologies Ltd. AVGO is a designer, developer of a variety of analog semiconductor devices which it supplies worldwide. The company concentrates on analog III-V compound based products.
Avago Technologies has gained 26.2% over the last 12 weeks. It carries a P/E ratio of 16.44 and the current year estimated earnings growth is 69.8%. The company currently carries a Zacks Rank #1 (Strong Buy).
Tough Times Ahead?
Stocks have had a tougher time this quarter, achieving some success only in February. A strong dollar, weak oil prices and dismal domestic data have all weighed on stocks. Jobs data has emerged as the only silver lining but has also prompted the Fed to move toward a possible rate hike later this year.
At the same time, the Fed Chair has allayed fears, emphasizing a gradual approach which has reassured investors. Meanwhile, there are expectations of a weak Q1 earnings season. Unless the domestic economy gains steam across sectors, stocks could experience further downside in the days ahead.
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