Markets had a comparatively lackluster November after posting record gains in the preceding month. Energy and financial stocks were the leading gainers as most sectors ended with gains. Major companies posted encouraging earnings while several important deals were struck. Both these factors helped stocks to move upward.
While economic data remained mixed, certain crucial reports delivered a boost to benchmarks. Meanwhile, the Fed indicated that a December rate hike was in the offing. Certain international incidents dampened investor sentiment, but their impact was limited and lasted for a relatively short period.
November’s Performance
For the month, the S&P 500, the Dow and the Nasdaq gained 0.1%, 0.3% and 1.1%, respectively. Benchmarks ended in the green for the month, buoyed by gains in the financial and energy sectors. Encouraging third quarter earnings report and merger and acquisition news had a positive impact on benchmarks.
Strong auto sales data and a better-than-expected reading of the ISM Services Index helped benchmarks to finish the month in the green. Additionally, benchmarks gained after minutes from last month’s Fed meeting confirmed that “most participants” were open to a rate hike in December.
Among the negatives, multiple terrorist attacks in Paris, greater violence in the Middle East, news regarding the shooting down of a Russian fighter jet near the border of Syria and concerns about China’s economic situation dented investor sentiment.
Q3 GDP Revised Upward
According to the "second" estimate by the Bureau of Economic Analysis, GDP grew at a pace of 2.1% in the third quarter, compared to an earlier projected growth rate of 1.5%. Third quarter growth also exceeded the consensus estimate of 2% growth.
An upward revision in business inventories emerged as the main reason behind the expansion in the quarter. Business inventories were revised upward from $56.8 billion reported in the “advance” estimate to $90.2 billion. However, third quarter growth remained below second quarter’s rate of 3.9%.
Job Additions Jump, Unemployment Falls
The U.S. economy added 271,000 nonfarm payroll jobs in October, experiencing its biggest monthly gain since Dec 2014. It also surpassed the consensus estimate of 182,000.
Additionally, the unemployment rate declined to a seven and a half year low of 5% last month from 5.1% in September. Moreover, the report showed that average hourly earnings increased 9 cents in October to $25.20 after rising only 1 cent in the prior month. It also registered a 2.5% year-on-year gain, recording its biggest gain since the recession in 2008.
Some Fed officials welcomed October’s strong jobs report. This included Chicago Federal Reserve President Charles Evans and St. Louis Fed President James Bullard.
Mixed Domestic Data
Reports released through the month depicted a mixed economic picture. The ISM manufacturing index touched its lowest level in October since May 2013. New orders for U.S. factory goods dipped for the second straight month in September.
U.S retail sales barely increased in October, gaining only 0.1%. PPI declined while CPI moved upward. Industrial production declined for the second consecutive month. Core PCE remained flat last month
On the positive side, the ISM Services Index increased to 59.1% in October from September’s reading of 56.9%. The rise was in contrast to the consensus estimate of a decrease to 56.2%. Markets were also aided by the fact that the pace of auto sales remained above 18 million for two consecutive months; the first such instance since 2000.
Housing Picture Fuzzy
Housing data presented a mixed picture once again. Construction spending in September rose by 0.6%.Existing home sales declined 3.4% to 5.36 million in October. However, existing home sales still increased 3.9% year on year.
The National Association of Home Builders (NAHB) homebuilders’ sentiment index slipped three points to 62 in November. Housing starts declined 11% in October. The S&P/Case-Shiller indexes for both 20 cities and 10 cities rose at a rate of 0.2% through July to September
New home sales increased 10.7% to a seasonally adjusted annual rate of 495,000 units in October from a revised September number of 447,000. Pending Home Sales Index increased 0.2% to 107.7 in October.
International Concerns
News that a Russian fighter jet SU-24 was shot down by two Turkish F16 jets near the border between Turkey and Syria had a negative impact on benchmarks. Turkish President Recep Tayyip Erdogan said that people living in the border area are Turkmen and not ISIS. He said since the war plane did not respond to their warnings, they opted to shoot it down.
However, Russia declined the claim of entering in the airspace of Turkey and President Vladimir Putin described the incident as "a stab in the back." Speculation arose that downing of the Russian fighter plane by Turkey, a NATO member, would heighten geopolitical tensions
Meanwhile, around 130 people were killed and hundreds others injured on a Friday evening in Paris, in what was France’s most devastating terror attack ever. Three teams of attackers carried out seven separate attacks in the country’s national capital. French President Francois Hollande vowed to fight ISIS but the incident had a limited and short lived impact on stocks.
Concerns about China’s economy continued to worry investors. Most data emanating from the country was dismal in nature. This led to fears about a further slump in growth. Even if the country managed to avoid such a situation, it is becoming increasingly clear that the world’s second largest economy will not deliver the spectacular growth numbers of the past going forward.
Encouraging Earnings, Deals Boost Stocks
Overall, earnings presented a mixed bag. In the opening week, encouraging third-quarter earnings reports from companies including Wal-Mart Stores WMT, Home Depot HD, The Clorox Company CLX, Michael Kors Holdings Ltd. KORS, Facebook, Inc. FB and Ralph Lauren Corp. RL had a positive impact on benchmarks.
Merger and acquisition news including that between Dyax Corp. DYAX and Shire plc SHPG, and Treehouse Foods, Inc. THS and ConAgra Foods, Inc. CAG also boosted investor sentiment. Separately, the announcement of the mega Pfizer Inc. PFE – Allergan plc AGN deal failed to lift spirits.
FOMC Minutes Hints at December Rate Hike
Minutes from the Federal Open Market Committee’s (FOMC) meeting in October stated that most officials anticipated that conditions to lift short-term interest rates “could well be met by the time of the next meeting” in December. The Fed is waiting to see further improvements in labor market conditions and inflation touching its target rate of 2% before hiking rates.
Fed officials said volatility in the financial markets has subsided since September. They said that “the U.S. financial system appeared to have weathered the turbulence in global financial markets without any sign of systemic stress.” Officials opined that there is “solid underlying momentum” in business and consumer demand, despite slowdown in third quarter GDP growth.
Additionally, New York Fed President William Dudley, Cleveland Fed President Loretta Mester and Atlanta Fed President Dennis Lockhart all supported a near-term interest-rate hike. Meanwhile, the CME Group showed that Federal-funds futures on Wednesday indicated a 68% likelihood of a Fed rate hike in its December policy meeting.
5 Star Performers for November
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% (as of Nov 30, 2015)
- 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 5 stocks that made it through this screen:
Ebix Inc. EBIX is one of the leading international suppliers of software and e-commerce solutions to the insurance industry.
Price gain over the last 4 weeks = 39.2%
Expected earnings growth for current year =33.5%
Ebix has a Zacks Rank #1 (Strong Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 16.95x.
Omega Protein Corp. OME is a developer and producer of dietary supplements and animal feed.
Price gain over the last 4 weeks = 37.3%
Expected earnings growth for current year = 21.2%
Omega Protein holds a Zacks Rank #1 (Strong Buy)and has a P/E (F1) of 14.9x.
Multi-Fineline Electronix, Inc. MFLX is a global provider of high-quality, technologically advanced flexible printed circuit and value-added component assembly solutions to the electronics industry.
Price gain over the last 4 weeks = 36.3 %
Apart from a Zacks Rank #2 (Buy), Multi-Fineline Electronix has a P/E (F1) of 13.59 x. The company’s projected earnings for the current financial year is more than 100%.
CONE Midstream Partners LP CNNX is an owner, operator and developer of natural gas gathering and related midstream energy assets.
Price gain over the last 4 weeks = 28.4%
CONE Midstream Partners holds a Zacks Rank #2 (Buy) and it has a P/E (F1) of 10.29x. The company’s projected earnings for the current financial year is more than 100%.
Orbotech Ltd. ORBK is a provider of production and yield enhancement solutions for printed circuit boards and LCDs.
Price gain over the last 4 weeks = 21.2%
Expected earnings growth for current year = 41.1%
Apart from a Zacks Rank #1 (Strong Buy), Orbotech has a P/E (F1) of 9.97x.
How Will Stocks Perform in December?
November was a particularly quiet month for the markets. International events, mostly incidents surrounding the situation in the Middle East, had no discernible impact on proceedings. Meanwhile, GDP and employment data were encouraging in nature. These reports provided the Fed with a favorable background to deliver strong indications about a rate hike in December.
With the third quarter earnings season coming to a close, market attention will turn to the rate hike decision. The Fed has provided ample hints that there is a high probability of a rate hike this month. Going forward, the fate of the markets is likely to be determined by whether or not investors have priced in such an event.
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