Benchmarks continued the winning momentum in the third quarter with S&P 500 and Nasdaq posting their seventh straight quarter of gains. For the quarter, the S&P 500, the Dow and the Nasdaq gained 0.6%, 1.3% and 1.9%, respectively.
However, the gains came based on the benchmarks’ performance in August, as it was the only month when the indices scored gains. The S&P 500 and the Dow suffered their first monthly declines since January in July, but rebounded strongly in August to snatch multi-month highs. Benchmarks finished in the red again in September.
Benchmarks tackled a slew of geopolitical tensions all through the third quarter to end with modest gains. The Russia-Ukraine crisis led to sanctions on Russia imposed by the western nations. Russia too retaliated with sanctions on import of food items. Both China and Europe’s economic data continued to disappoint.
The Street was busy throughout guessing what the Federal Reserve may decide about the rate hike. Finally, the latest policy meet suggested that the central bank will continue with the low rate environment for a considerable time. Economic data was largely positive and the latest GDP numbers were positive thanks to encouraging real personal consumption expenditure.
Monthly Performance & Events
July
For the month, benchmarks ended in the red zone. The S&P 500 and the Dow suffered their first monthly decline since January, declining 1.5% and 1.6%, respectively. The Nasdaq dropped 0.9%.
Escalating geopolitical tensions including the ones in Gaza and Ukraine unnerved investors. Benchmarks suffered their biggest losses in months on reports that a Malaysian Airlines passenger jet was shot down near Ukraine-Russian border. Concerns about the European banking system also dragged domestic benchmarks lower.
Benchmarks were negatively impacted after a Fed monetary policy report sparked concerns about “substantially stretched valuations” in Internet and bio-tech stocks. Fed Chairwoman Janet Yellen’s comment that federal funds rate might be raised sooner if the labor market keeps surprising the central bank dented investor sentiment.
Earnings Results
Dismal corporate results by Caterpillar Inc. (CAT), General Motors Co. (GM) and DR Horton Inc. (DHI) also weighed on the benchmarks.
Several companies also posted encouraging results. Facebook, Inc. (FB), Ford Motor Co. (F), Apple Inc. (AAPL), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) reported upbeat quarterly performances.
Economic Data
Manufacturing activity picked up in the U.S. The Institute for Supply management reported June PMI of 55.3%, indicating expansion in factory output for the 13th successive month.
Federal Reserve’s Beige Book stated that economic activity in all 12 Federal Reserve Districts expanded since the previous report. The NAHB/Wells Fargo Housing Market index touched its highest level in July since January. Existing home sales data hit the highest level in June since Oct 2013. However, pending home sales numbers for June declined.
According to the “advance” estimate by the Bureau of Economic Analysis, the second quarter GDP increased at an annual rate of 4.0%, beating the consensus estimate of an increase by 3.2%.
August
For the month, the S&P 500 advanced 3.8%. The index registered its best August performance since 2000. The Dow and the Nasdaq too gained 3.2% and 4.8%, respectively. The Dow and S&P 500 registered their best monthly gains since February.
Encouraging economic data and deal news provided a boost to markets. Most of the worrisome news was external in nature. This ranged from dismal economic data out of Europe to conflicts in Iraq, Gaza and Ukraine. Possibility of Eurozone stimulus measures and a banking rescue plan in Portugal were among the few positives on this front.
Mergers & Acquisitions
The failure of two high-profile merger deals – Sprint Corporation (S) and T-Mobile U.S. Inc. (TMUS), and Time Warner Inc. (TWX) and Twenty-First Century Fox, Inc. (FOXA) – dragged down the markets.
Shares of Tim Hortons Inc. (THI) jumped 8.5% after Burger King Worldwide (BKW) agreed to buy the Canadian restaurant chain. Amazon.com Inc. (AMZN) announced the acquisition of Twitch Interactive.
Economic Data
Upbeat ISM Services Index, factory orders, trade balance started off a month of largely positive economic reports. Industrial production rose 0.4% while PPI for finished goods increased 0.1% in July, in line with the consensus estimate. Housing data, including reports on homebuilder confidence, existing home sales and building permits were encouraging.
Separately, leading indicator index numbers, durable orders and consumer confidence also encouraged investors. Q2 GDP’s second estimate came in at 4.2%. This was higher than the consensus estimate of 3.9%, indicating an economic recovery.
Discouraging data on retail sales and home prices were among the few disappointing reports of the month.
Europe’s Banking & Growth Worries
Early in August, markets were boosted by a recovery plan for Portugal’s banking crisis. Subdued Chinese inflation data was the other positive.
Downbeat European growth numbers, discouraging retail sales numbers and disappointing Germany’s investor confidence data were some of the negatives. GDP data from the Eurozone was dismal.
Germany posted a higher-than-expected unemployment rate in August with a dismal inflation rate of 0.8%. Spain saw annual deflation rate of 0.5% in August.
Jackson Hole Speech
Both US Fed chairwoman Janet Yellen and ECB President Mario Draghi’s speeches at Jackson Hole, Wyo failed to encourage investors. In her speech at Jackson Hole, Yellen said the economy is approaching Fed’s target of full employment and a stable inflation rate.
However, she also mentioned that there is no “simple recipe” that the Fed could follow to determine whether it was achieving its targets.
Draghi also failed to provide any clear picture about weak growth in the Eurozone. At Jackson Hole, he said the ECB is looking to implement more flexible policies in order to combat the Eurozone’s high unemployment rate.
Geopolitical Tensions
Investors remained concerned about Russia’s military buildup along the eastern border of Ukraine. The lingering tension led to fresh sanctions being imposed on Russia. Moscow responded aggressively to Western sanctions by imposing bans on import of fruits and vegetables from Europe.
Tensions in Iraq also dented sentiments as the U.S. announced airstrikes against ISIS and airdrop of medicine and food for minorities.
In Gaza, the Israel and the Palestinians agreed to extend the ceasefire settlement by another five days. They were maintaining a 72-hour ceasefire agreement earlier, proposed by the Egyptian government.
September
For the month, the S&P 500, the Dow and the Nasdaq declined 1.6%, 0.3% and 1.9%, respectively.
Benchmarks snapped a five-straight week of gains for the week ending Sep 12 as concerns about sooner-than-expected rate hike raised bond yields to a record level. Nonetheless, the big news for the month was that the US Federal Reserve reassured investors that the low rate will continue for "a considerable time" after the bond repurchase program ends as the economy faces "significant underutilization of labor resources.”
Meanwhile, a drop in oil demand following discouraging Chinese and European economic data and a stronger dollar dragged down oil prices. While energy and utilities stock hurt the benchmarks, healthcare and information technology stocks added gains.
Chinese e-Commerce giant Alibaba Group Holding Ltd. (BABA) debuted on the Street in September. Its shares surged 38.1% to $93.89 on its debut, helping Alibaba raise over $21.8 billion.
Fed to Take ‘Considerable Time’ for Rate Hike
The central bank kept the phrase ‘considerable time’ in its policy statement, telling investors that the FOMC was in no hurry to start raising rates in the spring.
Fed funds rates were revised up to 1.375% and 2.875% for end of 2015 and 2016, respectively. The Fed also projected 3.75% for 2017.
The central bank trimmed its bond buyback plan by $10 billion to $15 billion a month as the central bank prepares to end the stimulus plan in October.
Domestic Economic Data
The Labor Department reported that the economy added 142,000 new jobs in August, lower than the consensus estimate of 224,000.
According to the “third estimate” by the Bureau of Economic Analysis, second quarter output of goods and services increased at an annual rate of 4.6%, revised up from an earlier estimate of 4.2%.
The University of Michigan and Thomson Reuters’ final reading of consumer remained at its highest level in September since Jul 2013. The gauge was at 84.6 in September.
The U.S. ISM Manufacturing Index surged to 59.0% in August, from 57.1% in July, beating the consensus estimate of 56.8%.
The U.S. homebuilders’ sentiment touched the highest level since Nov 2005. However, existing home sales declined unexpectedly in August, snapping four straight months of gains.
Building permits dropped 5.6% from July to a seasonally adjusted annual rate of 998,000 in August. Privately-owned housing starts declined 14.4% in August. However, both building permits and housing starts were promising compared to year-ago numbers.
The final trading day of the month saw some dismal data. The Consumer Confidence Index declined in September for the first time in last five months. The S&P/Case Shiller composite index of 20 cities increased 0.6% in July, less than the 1% rise in June.
Europe, China Disappoint
Sluggish growth data from the Eurozone and growth worries from China also dented investor sentiment. Markit reported that Eurozone’s composite Purchasing Managers Index (PMI) declined to 52.3% in September, compared to 52.5% in August. China’s industrial production expanded at the slowest pace since Dec 2008. China Finance Minister Lou Jiwei said the government will not “make major policy adjustments” based on any one economic indicator.
Separately, ECB president Mario Draghi said that ECB will opt for further policy easing to help the Eurozone’s economy to recover at a faster rate.
3 Star Performers for Third Quarter 2014
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 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 3 stocks that made it through this screen:
United States Steel Corp. (X) is a leading steel manufacturer in the U.S. and is the fifth largest globally. It produces and sells steel mill products including flat-rolled and tubular products in North America and Europe. U.S. Steel has an annual raw steel production capacity of 27 million net tons.
United States Steel has gained 51.7% over the last 12 weeks. It carries a P/E ratio of 17.06 and the current year estimated earnings growth is significantly high. The company currently carries a Zacks Rank #1 (Strong Buy).
CTPartners Executive Search Inc. (CTP) operates as an executive research firm engaged in providing for the recruitment and hiring of senior executives, officers and board members. Based in New York, the company’s practice includes Board Consultants, CFO/Financial Function, Human Resources, Retail & Consumer Goods and Technology, and Media & Telecom among others.
CTPartners has gained 48.3% over the last 12 weeks. It carries a P/E ratio of 17.08 and the current year estimated earnings growth is significantly high. The company currently carries a Zacks Rank #1 (Strong Buy).
SORL Auto Parts, Inc. (SORL) specializes in the development, production and distribution of air brake valves and hydraulic brake valves. Headquartered in the Ruian District of Wenzhou City, China's automotive manufacturing center, SORL sells its products to vehicle manufacturers, including all of the truck manufacturers in China.
SORL Auto Parts has gained 45% over the last 12 weeks. It carries a P/E ratio of 6.69 and the current year estimated earnings growth is 32.65%. The company currently carries a Zacks Rank #2 (Buy).
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