Markets rebounded in April, following heavy losses in March. Despite mixed to disappointing domestic economic data, benchmarks managed to close in the green. Stocks were boosted by strong earnings numbers and deal news. Stimulus measures implemented by China also helped the indexes while oil prices recovered. Weak GDP numbers meant that Fed officials could not provide clear indications about the timing of a rate hike.
April’s Performance
For the month, the S&P 500, the Dow and the Nasdaq gained 0.9%, 0.4% and 0.8%, respectively. Benchmarks ended in the green for the month following China’s stimulus measures, prospects of Visa Inc. V gaining access to China and McDonald's Corp.’s MCD turnaround plans.
Meanwhile, positive earnings results added to the bullish sentiment. Additionally, new deals boosted investor confidence. Separately, the European Central Bank’s decision to keep interest rates unchanged while continuing with its asset purchasing program was welcomed by investors.
On the other hand, Fed officials gave no clear guidance on the timing of interest rate hike, which did little to boost investor sentiment. They also remain uncertain as to when the economic growth will gain momentum due to lack of firm evidence.
Oil Prices Surge
Oil prices experienced their highest monthly gain in six years during April. Prices began the month on a low note. During the second week of the month, oil prices moved north, banking on strong German economic data and uncertainty over Iranian nuclear deal. Expectations on Iran taking longer time to increase oil exports and anticipation that rise in U.S. crude inventories is slowing down also boosted oil prices.
The upward movement continued during the third week. Dismal Chinese trade data raised hopes of stimulus measures in China, which in turn boosted oil prices. Oil prices also gained after the U.S. Energy Information Administration (EIA) forecasted U.S. shale production will decline in May, its first monthly decline in four years.
Additionally, U.S. commercial crude oil inventories increased less than expected for the week ending Apr 10. Turmoil in Yemen also contributed to price gains as it is expected to put a lot of pressure on supply levels.
Domestic crude oil price touched its highest level for this year during the fourth week. Oil prices moved north after Saudi Arabia and its allies bombed military bases in Yemen raising concerns about Middle East oil supplies. On the last day of the month, crude inventories experienced a weekly decline. This was caused by expectations that the production glut in the U.S. will begin to reduce.
Disappointing GDP Data
According to the “advance” estimate, first quarter GDP increased at an annual rate of 0.2%. This was less than the consensus estimate of an increase by 1%. This rise in first quarter GDP was also less than the fourth quarter’s growth in real GDP by 2.2%.
Growth was hampered by harsh winter weather, cheaper oil prices, stronger dollar and disruptions in Western Coast ports. Meanwhile, real personal consumption expenditure, which accounts for almost two-third of the U.S. economy, increased 1.9% in the first quarter. This however was significantly less than the 4.4% increase in the fourth quarter. However, federal government spending expanded at 0.3%, which compared favorably to a 7.3% fall in the fourth quarter.
Labor Market Slackens
The U.S. economy created a total of 126,000 jobs in March, less than the consensus estimate of 247,000. Job additions fell below 200,000, bringing an end to the unbroken run of 12 such successive monthly gains. Additionally, data for both January and February was revised downward, which means that 69,000 less jobs were added during these months taken together.
As a result, hiring in the first quarter declined to an average of 197,000, compared to job additions of 289,000 in the fourth quarter. Additionally, labor force participation rate touched a 37-year low of 62.7%.
Private sector job additions were weaker than expected in March. The national employment report from Automatic Data Processing, Inc. ADP showed 189,000 private jobs were added in March, less than expectations of an increase of 230,000 jobs. March’s job additions were also lower than February’s revised figure of 214,000
However, hourly pay gained a solid 0.3% in March from prior month and 2.1% from a year earlier. Average hourly earnings have advanced by 7 cents for those employed by the private sector in March.
Separately, the unemployment rate remained at a six and a half year low figure of 5.5% in March. The U-6 rate which includes the unemployed, the underemployed and the discouraged also dropped to 10.9% in March, the first time it has gone below 11% since Aug 2008.
Mixed Domestic Data
Other economic data for the month was largely on the negative side. Manufacturing activity in the U.S. expanded at the slowest pace in March since May 2013. Services data was also disappointing while construction spending, industrial production and consumer confidence declined. Housing starts came in weaker than expected while the lower than expected increase in CPI raised concerns about the timing of a rate hike.
On the positive side, auto sales increased while factory orders in February reversed a six-month declining trend. Retail sales rebounded in March after declining in the previous three months. Leading economic index improved while durable goods jumped in March.
Housing sector data indicated that the recovery was continuing, but a slower pace. New home sales and S&P/Case Shiller home prices data was disappointing in nature. On the other hand, pending home sales and existing home sales added to the bullish sentiment.
Reforms in China
The Markit-HSBC Purchasing Managers’ Index showed manufacturing activity in China fell to 49.2 in April, its lowest level in last twelve months. This was among a series of weak economic reports which raised doubts about the country’s economic health.
China implemented new market regulatory measures aimed at deterring speculative trading. The Securities Association of China allowed fund managers to lend shares for short selling in order to increase the supply of shares. Types of shares that investors can short sell will be increased from 900 to 1,100. Further, the China Securities Regulatory Commission mentioned that it has levied sanctions to control over-the-counter margin trading.
Additionally, the People’s Bank of China said that it will trim its reserve requirement by one percentage point which will free up about $200 billion for commercial banks to lend. This is the second time in less than three months that the central bank has decided to reduce its reserve requirements.
European Situation
ECB President Mario Draghi said the central bank’s stimulus program is “finally finding its root” through easier credit situations and lower interest rates. ECB kept its record low lending rates unchanged. The apex bank also intends to continue its euro 60 billion monthly bond buying program through Sept 2016. ECB’s commitment to revive the Eurozone economy had a positive impact on broader markets.
Meanwhile, German industrial orders, a key measure of demand for goods in the country, increased 0.2% in February compared to a month earlier. German adjusted trade surplus remained more or less steady at 19.6 billion euros in February, with both exports and imports rising 1.5% and 1.8%, respectively, from a month earlier.
However, PMI data from Eurozone turned out to be weaker than expected. Germany’s manufacturing PMI fell to 51.9 in April from 52.8 in March. France’s manufacturing PMIs too dropped to 48.4 in April from 48.8 last month.
Concerns over Greece defaulting on its heavy debt burden also had a negative impact on benchmarks. Despite sustained efforts, a series of international negotiations with the country’s international creditors have failed to secure more aid.
Encouraging Earnings Numbers, Deal News
A slew of positive earnings results from the likes of Apple Inc., IBM Corp. IBM, JPMorgan Chase & Co. JPM, Citigroup Inc. C, Goldman Sachs Group Inc GS, Caterpillar Inc. CAT, Pepsico, Inc. PEP, The Coca-Cola Co KO, The Boeing Company BA, UnitedHealth Group Inc. UNH, Merck & Co. Inc. MRK, and Pfizer Inc. PFE added to the bullish sentiment.
As of Apr 30, about 276 S&P 500 members had reported first quarter earnings results. Among the 276 members, first quarter earnings improved 9.1% on essentially flat revenues, with 65.8% beating earnings per share estimates and 41.7% coming ahead of top-line expectations.
Additionally, new deal between Mylan N.V. MYL and Teva Pharmaceutical Industries Ltd. TEVA, Mylan N.V. and Perrigo Company Plc PRGO, and FedEx Corp. FDX and TNT Express boosted investor confidence.
Teva Pharmaceutical offered to acquire Mylan for about $40 billion or $82 a share in cash and stock. However, Mylan N.V. rejected Teva’s takeover bid later in the month, citing it to be grossly undervalued.
Meanwhile, Mylan had proposed to acquire Dublin-based drug maker Perrigo in a cash-and-stock deal valued at $205 per share. FedEx announced that it will acquire one of Europe’s largest delivery companies, TNT Express, for $4.8 billion.
FOMC Minutes, Policy Statement
Early in the month, New York Fed President William Dudley said the timing of hiking rates “will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated.”
Minutes from the Federal Open Market Committee’s (FOMC) meeting on Mar 17-18 stated officials were divided on the timing of raising interest rates. The minutes also showed Fed officials believed an increase in core price inflation or wage inflation isn’t required for hiking federal funds rate. Improvement in labor markets, stabilization of energy prices and leveling out of the value of the dollar will be more than enough for them to consider raising interest rates.
The Federal Open Market Committee’s two-day policy meeting concluded near the end of the month. However, Fed officials remained uncertain as to when the economic growth will gain momentum due to lack of firm evidence. They gave no clear guidance on the timing of interest rate hike, which eventually did little to boost investor sentiment.
3 Star Performers for April
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 (as of Apr 30) greater than or equal to 20%
- 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 7 that made it through this screen:
SuperCom Ltd. SPCB is a provider of radio frequency identification solutions. It offers advanced safety, identification and security products and solutions primarily to Governments, private and public organizations.
Price gain over the last 4 weeks = 35.3%
Expected earnings growth for current year = 49.4%
SuperCom holds a Zacks Rank #2 (Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 10.22.
China Southern Airlines Co. Ltd. ZNH is one of the leading air transportation enterprises in China. It is one of the largest operators in the sector in terms of passenger volume.
Price gain over the last 4 weeks = 27.1%
China Southern Airlines holds a Zacks Rank #2 (Strong Buy) and its expected earnings growth for the current year is above 100%. It has a P/E (F1) of 7.73x.
Aaron's, Inc. AAN is engaged in the sales and lease ownership and specialty retailing of residential and office furniture, consumer electronics, home appliances and accessories.
Price gain over the last 4 weeks = 25%
Expected earnings growth for current year = 26.8%
Apart from a Zacks Rank #1 (Strong Buy), Aaron's has a P/E (F1) of 16.18x.
Can Stocks Sustain Gains?
Despite a recovery over the month, the outlook for stocks remains uncertain. Weak domestic data and a strong dollar continue to act as a drag on stocks. The initial Q1 GDP numbers have been disappointing. Additionally, the labor market is showing signs of weakness.
The Fed’s assessment of the economy has been cautious and there are concerns about economic weaknesses. Most of April’s gains are attributable to positive earnings numbers and deal news. China’s stimulus measures have also boosted stocks. However, the domestic economy needs to gain momentum in order to improve market fundamentals. Any positive news on this front will help stocks sustain gains in May.
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