China’s move to trim borrowing rates, ECB’s hint to expand its asset purchasing program and gains in energy stocks had helped benchmarks to post their biggest monthly gain in October in four years. Banking on this positive momentum, it was expected that the major indexes will continue their winning streak in November. However, a series of factors dragged benchmarks lower.
In November, S&P 500, Dow and Nasdaq declined 1.4%, 0.9% and 1.3%, respectively, month to date. In fact, last Friday, the S&P 500 fell below its 200-day moving average, while the Nasdaq closed below its 50-day moving average. The tech-laden index also ended below its key level of 5,000 for the first time since Oct 22.
Rate hike fears in December along with global growth worries fueled by a dismal economic situation in China weighed on investor sentiment. A handful of discouraging retail earnings reports and weak retail sales data also led to the fall in benchmarks. Additionally, travel and airline companies took a beating in the wake of the Paris terror attacks, while energy shares fell due to a drop in oil prices on oversupply concerns.
Meanwhile, weak domestic industrial output data, decline in factory orders and the ISM manufacturing index touching its lowest level in October since May 2013 raised concerns about the robustness of fourth-quarter economic growth.
However, all is not discouraging on the domestic front. The ISM Services index increased last month, while the labor market showed signs of improvement, banking on October’s stronger-than-expected jobs report. Markets were also aided by Autodata’s report that the auto sales rate increased in October. Separately, encouraging quarterly earnings results by Wal-Mart Stores Inc. WMT and The Home Depot, Inc. HD on Tuesday eased fears of a possible slowdown in consumer spending levels.
Hence, in this scenario, it will be prudent to invest in value stocks in November as their value is positioned to gain once the broader market recognizes their full potential. Further, estimated earnings growth rate for these stocks are expected to grow significantly this year, a trend generally associated with successful companies.
Let's look into the factors that have impacted the markets:
Dismal Chinese Economic Report
Concerns about global growth due to China’s economic situation continued to dampen investor sentiment. China posted a decline in both exports and imports in October, which raised the trade surplus to $61.64 billion. Total trade volume also slumped 8.5% through January to October from the year-ago period, in contrast with 2015’s official target of 6% growth.
Meanwhile, consumer prices increased 1.3% last month, lower than a 1.6% rise in September. It was also reported that producer prices plunged 5.9% in October, reaching their lowest level since Oct 2009. It was the 44th consecutive month in which producer prices finished in the red. Weak Chinese inflation data dragged down global copper prices, which in turn had a negative impact on the U.S. materials sector.
Fed Rate Hike
Fed Chair Janet Yellen said that a rate hike in December was a “live possibility.” Yellen said a rate hike of 25 basis points in December won’t adversely affect the economy or the housing market. However, ultra-low interest rates have aided economic recovery and helped markets enjoy the Bull Run.
Additionally, Atlanta Fed president Dennis Lockhart said that the case for a rate hike will “continue to firm up.” Further, October’s upbeat nonfarm payroll report raised the possibility of a rate hike in December. While increased rate-hike possibilities boosted financial stocks, it had a negative impact on the utilities sector.
Weak Retail Sales Report
Weaker-than-expected retail sales data added to the dour mood. U.S. retail sales barely increased in October, held down mostly by lower spending in auto dealers, gas stations and grocery stores. Moreover, discouraging earnings results from departmental stores including Nordstrom Inc. JWN and J. C. Penney Company, Inc. JCP adversely affected investor sentiment.
Nordstrom reported third quarter earnings per share of 57 cents, way below the Zacks Consensus Estimate of 71 cents. J. C. Penney also posted a third quarter loss per share of 47 cents.
Travel Related Stocks Hit on Terror Attacks
France stepped up airstrikes in Syria on Monday in response to the multiple terrorist attacks in Paris last Friday, with the Islamic State claiming responsibility for such attacks. About 130 people were killed and several others were injured on Friday in Paris, in what is France’s most devastating terror attack ever.
Travel and airline companies took a beating in the wake of the events. Shares of online travel related companies including The Priceline Group Inc. PCLN and Expedia Inc. EXPE along with airline company Delta Air Lines, Inc. DAL continued to decline.
Mixed Economic Data
The Board of Governors of the Federal Reserve System reported a decrease in industrial production. The report stated that industrial production declined another 0.2% in October after it slipped 0.2% in September. Additionally, the ISM manufacturing index declined from September’s 50.2% to 50.1% in October, while new orders for U.S. factory goods dipped for the second straight month in September.
However, the ISM Services Index increased to 59.1% in October from September’s reading of 56.9%. Moreover, an increase in job additions in October; unemployment rate declining to 5% and significant improvement in wage growth indicated that the labor market is on a solid footing.
Other Encouraging Trends
Along with the jobs report, auto sales data turned out to be positive. The auto sales rate in October increased to 18.2 million cars from 16.6 million in the year-ago period – a reading above 18 million for two consecutive months; the first such instance since 2000.
On the retail front, encouraging quarterly earnings results from Wal-Mart Stores and Home Depot eased fears of an across-the-board consumer-spending slowdown. Further, investors chose to shake off concerns about the Paris attacks as they believed that it won’t have a lasting impact on the U.S. economy and corporate earnings.
5 Value Picks with Earnings Growth
Given these positive trends it is expected that the broader markets will continue to move north in the near term. Further, history shows that from November through April each year, the financial markets have consistently outperformed returns over the period from May to October.
Since the long term holds well for stocks, despite certain bottlenecks, it will be a wise decision to invest in value stocks. Value investing offers an opportunity to enter the market and grab stocks that have otherwise been overlooked by a majority of investors, and are thus trading at cheap multiples.
Thanks to our new style score system we have been able to identify value stocks which have incredible potential in the near term. Our research shows that stocks with a Value Style Score of ‘A’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space. Further, we have chosen those value stocks that have an estimated growth rate of more than 25% this year.
Tesoro Corp. TSO is primarily engaged in petroleum exploration and production. TSO holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ TSO’s estimated growth rate for this year is 104.4%.
Hawaiian Holdings Inc. HA is a holding company of Hawaiian Airlines, the largest airline headquartered in Hawaii. HA holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘A.’ HA’s estimated growth rate for this year is 97.4%.
BJ's Restaurants, Inc. BJRI owns and operates casual dining restaurants. BJRI holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘A.’ BJRI’s estimated growth rate for this year is 61.4%.
United Therapeutics Corp. UTHR is a biotechnology company focused on combating cardiovascular diseases. UTHR holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ UTHR’s estimated growth rate for this year is 82.9%.
Carnival plc CUK is the largest cruise company in the world. CUK holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘A.’ CUK’s estimated growth rate for this year is 30.1%.
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 >>
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
Be the first to comment