Markets posted their best monthly performance in four years in October. Stocks recovered from their deepest correction, also in four years, in August to post strong gains. Investors largely ignored weak economic data to focus on positive external signals. In a surprise move, China’s central bank cut key rates, leading to further optimism.
Additionally, the European Central Bank (ECB) said it would take further measures to boost the region’s economy. Tech and healthcare stocks staged a strong rebound, boosting the broader markets. Finally, the Federal Reserve refrained from hiking rates but indicated that such a move was likely in December.
October’s Performance
For the month, the S&P 500, the Dow and the Nasdaq soared 8.1%, 8.6% and 9.2%, respectively. Indications of further stimulus measures in the Euro zone and China helped benchmarks end in positive territory for the month. A jump in healthcare stocks and strong rebound in energy shares also boosted major benchmarks.
Though economic data was dismal overall, reports such as housing starts and existing home sales had a positive impact on major benchmarks. Earnings numbers were mixed, once again reflecting weakness in revenues. However, impressive results from the tech sector and resurgence in healthcare stocks also boosted the broader markets.
Q3 GDP Declines
According to the "advance" estimate by the Bureau of Economic Analysis, GDP slowed to an annual rate of 1.5% in the third quarter of 2015, down from the rate of 3.9% recorded in the second quarter. Third quarter growth was also short of the consensus estimate of 1.6%.
Negative contributions from private inventory investment somewhat offset the positives. In addition to a decline in private inventory investment, the third quarter growth estimate slowed from the second quarter owing to negative contributions from exports, non-residential and residential fixed investment, personal consumption expenditures and state and local government spending.
Job Additions Slide, Unemployment Flat
A weaker-than-expected September jobs report raised concerns about a slowdown in economic growth and its adverse impact on the Federal Reserve’s decision on the timing of an interest rate hike. The U.S. economy added 142,000 jobs in September, significantly lower than the consensus estimate of 202,000. Employment gains for the previous two months were also trimmed by a combined 59,000.
The unemployment rate remained flat at 5.1% in September, mostly due to the labor force participation rate declining to 62.4%, its lowest level since 1977. Separately, average hourly wage of American workers dipped by a penny in September following an increase in August.
Disappointing Domestic Data
Most of the economic data released during October was disappointing. The ISM Manufacturing Index declined to 50.2 in September, hitting its lowest mark in the last two years. Durable orders dropped by 1.2% in September, declining for the second consecutive month.
Factory orders declined 1.7% in August following an increase of 0.2% in July. Industrial production fell 0.2% in September after decreasing 0.1% in August. The Consumer Confidence Index dropped to 97.6 in October after gaining modestly in September. Industrial production fell 0.2% in September after decreasing 0.1% in August. Retail sales increased by just 0.1% in September.
A slump in gasoline prices dragged down both the PPI and the CPI. The PPI declined 0.5% in September, wider than the consensus estimate of a 0.2% decline. The CPI declined 0.2% in September, following a 0.1% decline in August.
Mixed Data on Housing
Housing data presented a mixed picture once again. Construction spending in August rose by 0.7%. Existing home sales rose 4.7% to 5.55 million in September from August’s downward-revised figure of 5.3 million and beating the consensus estimate of 5.36 million.
The National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI) hit a 10-year high in October. Both the 10-city and 20-city Case-Shiller Home Price Indices showed improvements in August.
However, the Pending Home Sales Index dropped to the second lowest reading this year in September, marking its second consecutive monthly decline. New home sales slumped by 11.5% in September. Housing starts increased 6.5% in September but building permits declined 5%.
China Rate Cut Boosts Markets
The People's Bank of China (PBOC) announced on Oct 23 that it was reducing key rates in order to boost the economy, which is on the verge of experiencing its lowest annual growth rate in 25 years.
The PBOC reduced the one-year benchmark bank lending rate and one-year benchmark deposit rate by 25 basis points to 4.35% and 1.5%, respectively, effective from Oct 24. This was the sixth time in less than a year when the bank opted for a rate cut. Also, the reserve requirement ratio (RRR) was reduced by 50 basis.
This was the sixth time that the PBOC reduced key rates this year, ahead of the crucial Communist party meeting, which was scheduled last week. China’s market participants expect the government will indicate that it will continue to take steps to support the economy going forward.
ECB’S Dovish Stance
ECB President Mario Draghi’s dovish comments had a positive impact on the broader markets. He indicated that the central bank could expand its quantitative easing measures at its December meeting.
Draghi said the ECB would re-examine monetary policy since he believes that economic recovery and inflation in the Eurozone will be adversely affected by slow growth in the emerging economies. He added that the Governing Council is willing to utilize all possible easing measures, including a further cut to the deposit rate.
Energy, Healthcare Stocks Rebound
Energy stocks staged a spectacular rebound in October. The Energy Select Sector SPDR XLE surged, gaining 11.2% over the month and ending as the second best performer among the 10 sector indices.
The continuous decline in the U.S. oil rig count and a smaller-than-expected rise in U.S. crude inventories during the last week of the month were the main reasons behind the oil price recovery. Russia’s willingness to meet major oil producers to discuss the present oil market scenario and a rally in U.S. gasoline prices also had a positive impact on global oil prices.
Better-than-expected earnings results from companies including UnitedHealth Group Inc. UNH and Gilead Sciences Inc. GILD helped the healthcare sector stage a rebound. The Health Care Select Sector SPDR ETF XLV ended the month 7.7% higher.
Tech Earnings Impress
Investors applauded stronger-than-expected results from three tech behemoths – Alphabet Inc. GOOGL, Amazon.com, Inc. AMZN and Microsoft Corp. MSFT. Strong results from these companies led the U.S. stock market's revival during the latter half of the month.
As of Oct 21, the reported year-on-year earnings and revenue growth were in the negative for the tech sector. However, as of Oct 23, the sector’s earnings and revenue growth had turned positive. The tech sector was largely boosted by the three behemoths that declared decent numbers.
Better-than-expected earnings results from Apple Inc. AAPL also played an important role in boosting major benchmarks at the end of October. Shares of Apple jumped 4.1% on Oct 28 after announcing a 38% year-on-year increase in fiscal fourth quarter earnings per share to $1.96, beating the Zacks Consensus Estimate of $1.88. The Technology Select Sector SPDR XLK gained 10.5% over the month.
Earnings Present Mixed Bag
Overall, earnings presented a mixed bag. Among other third quarter earnings results, General Motors Company GM and The Boeing Company BA reported upbeat quarterly earnings results.
However, disappointing earnings results came from The Coca-Cola Company KO and IBM Corp. IBM. Two of the largest oil companies, Exxon Mobil Corp. XOM and Chevron Corp. CVX, reported mixed quarterly results.
Fed Keeps Rates Unchanged
Though the central bank kept the key interest rates unchanged in October’s meeting, there were indications that a December rate hike is still on the cards. After concluding its two-day policy meeting on Oct 28, the Federal Reserve indicated that there is a possibility of a lift-off in December provided the economy is strong enough to sustain it.
The Fed stated: "In determining whether it will be appropriate to raise the target range at its next meeting, the committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation." It kept the rate unchanged in its latest meeting with nine out of 10 members voting against a lift-off.
The central bank said, "The pace of job gains slowed and the unemployment rate held steady." The Fed remained confident of achieving the 2% inflation rate target in the medium term. It said that the economy is growing at a “moderate” rate.
Moreover, the Fed looked less concerned about the global slowdown and volatility in financial markets as it dropped the phrase from September’s statement that these “may restrain economic activity somewhat.”
5 Star Performers for October
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 20%
- Forward price-to-earnings (P/E) ratio 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 5 stocks that made it through this screen:
American Railcar Industries, Inc. ARII is a leading North American manufacturer of covered hopper and tank railcars.
Price gain over the last 4 weeks = 69.5%
Expected earnings growth for current year = 30.4%
American Railcar has a Zacks Rank #2 (Buy). The stock’s forward P/E ratio for the current financial year (F1) is 9.38x.
Hawaiian Holdings Inc. HA is a holding company of Hawaiian Airlines, the largest airline headquartered in Hawaii.
Price gain over the last 4 weeks = 40.3%
Expected earnings growth for current year = 97.2%
Hawaiian Holdings holds a Zacks Rank #1 (Strong Buy) and has a P/E (F1) of 11.35x.
New Oriental Education & Technology Group Inc. EDU is the largest provider of private educational services in China
Price gain over the last 4 weeks = 37.8%
Expected earnings growth for current year = 21.8%
Apart from a Zacks Rank #1 (Strong Buy), New Oriental Education & Technology has a P/E (F1) of 18.67x.
CACI International Inc. CACI delivers IT applications and infrastructure to improve communications and secure the integrity of information systems and networks.
Price gain over the last 4 weeks = 31.9%
Expected earnings growth for current year = 30.9%
CACI International holds a Zacks Rank #1 (Strong Buy) and it has a P/E (F1) of 17.86x.
Encore Wire Corp. WIRE is a manufacturer of copper electrical building wire and cable products.
Price gain over the last 4 weeks = 30.8%
Expected earnings growth for current year = 27.5%
Apart from a Zacks Rank #1 (Strong Buy),Encore Wire has a P/E (F1) of 18.84x.
Will Gains Continue in November?
Stocks have moved upward in October despite the spate of weak domestic economic reports. The rate cut from China has acted as a major stimulus for the markets. Moreover, investors have been reassured that the country’s government will continue to take steps to boost its flagging economy. The ECB has also indicated that it will continue to support the region’s economy.
The nature of economic data released this month will determine the fate of stocks in November to a large extent. They will also play a major role in deciding whether the Fed will ultimately raise rates in December. This could work both ways for the markets.
If investors have not priced in a rate hike, positive economic indicators could spoil the party for the markets. However, if domestic data is strong in nature and investors believe that the economy will grow gradually even as rates rise, benchmarks will continue their upward ascent.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
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