International headwinds dragged down the markets in September as all the benchmarks took losses over the month. Geopolitical tensions, emanating from Russia, the conflict in Syria, the Scottish independence vote and pro-democracy protests in Hong Kong weighed on stocks.
Meanwhile, disappointing data from China and the Eurozone also dented investor sentiment. Positive economic data, including bullish GDP numbers, failed to boost stocks. However, indications that the Fed would keep interest rates unchanged for a “considerable time” did provide some respite to markets.
September’s Performance
For the month, the S&P 500, the Dow and the Nasdaq declined 1.6%, 0.3% and 1.9%, respectively. Benchmarks ended in the red for the month due to heightened geopolitical tensions. Violent confrontations took place between pro-democracy supporters and the Hong Kong government on Monday.
Last Thursday, Russia took an aggressive stance against the latest sanctions issued by western countries. Meanwhile, the U.S. launched massive air strikes for the first time against militants in Syria last Tuesday.
Sluggish growth data from the Eurozone, China’s dismal economic data and concerns about the Scottish independence vote also dented investor sentiment. Announcement of tighter-than-expected tax inversion rules too had a negative impact on benchmarks.
Meanwhile, a drop in oil prices during the month affected energy stocks. Discouraging Chinese and European economic data along with stronger dollar were cited to be the reason behind the fall in oil prices.
Domestic Economic Data
The first week of the month witnessed a series of positive economic reports on services, manufacturing, construction spending and factory orders. However, the economy added only 142,000 new jobs in August, significantly lower than the consensus estimate of 224,000.
Moreover, the labor participation rate remained almost unchanged at 62.8% in August. This was the lowest level in about 20 years. However, the unemployment rate declined marginally in August to 6.1% from 6.2% in July.
Among other positive news on the economic front was a 0.6% increase in retail sales for August, the biggest gain in four months. This rise in retail sales also exceeded the consensus forecast of an increase of 0.5%. The gain was led by increase in auto sales. Sales at auto dealers jumped 1.5%, the biggest rise since March.
Separately, the University of Michigan and Thomson Reuters’ final reading of consumer sentiment remained at its highest level in September since Jul 2013. Most significantly, the “third estimate” of second quarter GDP increased at an annual rate of 4.6%, revised up from an earlier estimate of 4.2%.
Durable goods orders were discouraging. However, the report on new home sales data was positive. On the whole, most economic reports were on the positive side.
However, 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. Separately, the S&P/Case Shiller composite index of 20 cities increased 0.6% in July, less than the 1% rise in June.
Fed Eases Rate Hike Concerns
Investors remained focused on the Federal Reserve’s two-day policy meeting as they were concerned about sooner-than-expected rate hike. Ultimately, the Federal Reserve said it would keep short-term interest rates near zero for a “considerable time.” Fed pledged not to hike rates immediately after the end of the quantitative easing program.
Fed Chairwoman Janet Yellen said the pledge to keep low interest rates depends on the state of the economy. She said: “The labor market has yet to fully recover.” This statement boosted investor sentiment. The central bank also provided new rate projections. Fed funds rates are estimated at 1.375% and 2.875% for end of 2015 and 2016, respectively. Meanwhile, the Fed reduced its bond repurchases for the seventh month in a row.
External Economic Factors
China’s industrial production expanded at the slowest pace since Dec 2008. Industrial production increased by 6.9% in August year over year, less than 9% in July. China also posted its first drop in electricity production since 2009.
Markit reported that composite Purchasing Managers Index (PMI), an indicator of the health of Eurozone’s manufacturing and services sectors, declined to 52.3% in September, compared to 52.5% in August. This was the lowest level this year.
ECB president Mario Draghi said that the ECB will opt for further policy easing to help the Eurozone’s economy recover at a faster rate. In contrast, China’s Finance Minister Lou Jiwei said the government will not “make major policy adjustments” based on any one economic indicator.
Geopolitical Tensions
Concerns about the Scottish independence vote also dented investor sentiment. Ultimately, investors were encouraged by polling results that showed Scotland will remain united with U.K. A majority of the voters voted against Scottish independence.
Meanwhile, Russia took an aggressive stance against sanctions issued by western countries recently. A draft law was submitted to Russia’s parliament, which, if approved, would enable the seizure of assets of foreign companies in the country. Recently, the U.S. and the European Union issued a series of sanctions against Russia, mainly targeting their energy companies.
Separately, Haider al-Abadi, the Iraqi Prime Minister, warned that militants of ISIS are planning to organize terror attacks on metro subways of the U.S. and France. Meanwhile, the U.S. launched massive air strikes for the first time against militants in Syria. The bombing was also supported by its Arab allies. Reportedly, a number of ISIS militants and some members from the Khorasan group, supposedly an affiliate of al-Qaeda, were killed in this attack.
Violent confrontations took place between pro-democracy supporters and the Hong Kong government on Monday. Protests were centered on China’s decision to levy restrictions on how Hong Kong voters elect their leaders. Beijing refused to allow open selection of candidates for the position of the chief executive.
Hong Kong’s financial industry took a beating as several banks had to close their branches. Hong Kong’s de facto central bank, the Hong Kong Monetary Authority, geared up to pump liquidity into the banking system.
3 Star Performers for September
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 15%
- 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 5 that made it through this screen:
Super Micro Computer, Inc. (SMCI) develops and offers end to end computing solutions. These solutions are used by Datacenter, Cloud Computing and Enterprise IT across the world. The company's solutions include a range of rack mount and blade server systems, as well as components. Supermicro emphasizes superior product design and uncompromising quality control to produce industry-leading serverboards, chassis and server systems.
Percentage price gain over the last 4 weeks = 20.1%
Expected earnings growth for FY2014 = 38.8%
Super Micro Computer holds a Zacks Rank #1 (Strong Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 18.26.
Horizon Pharma plc (HZNP) is a biopharmaceutical company that is developing and commercializing medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases. The company's products include FDA approved DUEXIS for the treatment of pain, osteoarthritis, and rheumatoid arthritis; The company also produces LODOTRA for rheumatoid arthritis and asthma;
Percentage price change over the last 4 weeks = 17.8%
The company has significant expected earnings growth for FY2014 and holds a Zacks Rank #2 (Buy). Horizon Pharma has a P/E (F1) of 15.26.
Phibro Animal Health Corp. (PAHC) is a global diversified animal health and mineral nutrition company. It develops, produces and markets a wide range of products for food animals such as poultry, swine, beef and dairy cattle. The company operates across segments such as Mineral Nutrition, Animal Health and Performance Products.
Percentage price change over the last 4 weeks = 16.1%
Expected earnings growth for FY2014 = 21.5%
Apart from a Zacks Rank #2 (Buy), Phibro Animal Health has a P/E (F1) of 14.99.
International Factors Hold the Key
Unlike last month, all three benchmarks have closed in the red. Geopolitical tensions and foreign economic reports have negated a series of positive domestic economic indicators. This includes bullish GDP data and an increase in retail sales, services and manufacturing indices, construction spending and factory orders.
There is hope on the Eurozone front with the ECB promising further policy actions to boost the region’s economy. On the other hand, China has indicated that it will desist from using monetary using for now. The more significant factors which could influence stock movements are geopolitical tensions emanating from Russia, Syria and Hong Kong. Investors will watch these developments keenly because they may well hold the key to market direction in the days ahead.
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