The following is an excerpt from John Blank's latest Zacks Market Strategy for February. To access the entire PDF, click here.
January offered up a whopper jobs report.
The U.S. added +257K jobs in January. On top of that, hiring in the final two months of 2014 was even stronger than previously reported. The Labor Dept. revised up November's job gain to +423K from +353K. It revised up December to +329K from +252K.
Cutting in the other direction, cuts to Energy EPS had made for a choppy start to the New Year for the S&P 500. With the new job numbers in — and after 2014’s +12% S&P 500 rise — a stock market melt-up on trend is still the base case.
Global divergence may recede as this market’s top-down theme. If it does, that could create bullishness this year. The divergence mantra says trade on higher GDP growth in the U.S., and lower GDP growth and lower rates abroad. That remains the consensus view early in 2015.
A positive surprise outside the U.S. remains a real possibility.
The Latest San Francisco Fed View is Bullish
The San Francisco Fed had three worthy views to share this time around:
(A) GDP – U.S. Growth Moderates
“We expected the GDP data to show moderate growth for the fourth quarter of 2014 and [for it to] continue into 2015. There should be some payback from inventory buildups that occurred during the exceptional growth experienced in the second and third quarters of last year. We have already seen some signs of moderation, including modest declines in durable goods and orders for core capital equipment in November.”
(B) Oil Prices – Modest Effects on Inflation
“We expect future headline inflation to dip as recent energy price declines work their way through the rest of the economy, although they should have only a modest impact on core inflation. We continue to anticipate that core inflation will move upwards over time towards the Federal Open Market Committee’s 2% target.”
(C) Weak Global Growth – Look for a Positive Surprise
“Expectations of weak growth abroad are a primary source of weakness in our current outlook for the United States. We anticipate limited growth in the advanced economies, particularly the euro area and Japan. There is considerable uncertainty about the euro area, particularly with respect to future European Central Bank asset purchases. Japanese growth appears to have stalled in 2014 following the country’s consumption tax hike. Among emerging market economies, China’s ongoing slowdown is also a source of considerable concern.
“Expectations for global growth are so low, however, that a positive surprise may emerge. First, policy responses to economic difficulties abroad are likely to be accommodative. Second, the aforementioned energy price declines and the strength of the dollar are both likely to boost growth in the euro area and Japan in 2015.”
Zacks Sector/ Industry/Company Telescope
In February, the mobile computer world’s parts — and consumer electronics generally — lead the way. Buyers are clearly stepping up for HDTVs, new computers of all types, and mobile phones.
(1) Info Tech is Very Attractive once again. The leaders are Misc. Tech, Computer-Office Equipment and Semiconductors.
Company to look at: Taiwan Semiconductor (TSM)
Taiwan Semiconductor Manufacturer Co. is the world’s largest dedicated integrated circuit foundry. As a foundry, TSM manufactures ICs for its customers based on their proprietary IC designs, using its advanced production processes.
(2) Consumer Discretionary is an Attractive Sector. Consumer Electronics is the top industry. Non-food Retail and Other-Cons Disc. are at Attractive. Autos-Tires-Trucks and Home Furnishings-Appliance industries rest at Market Perform.
Company to look at: CVS Health Corp. (CVS)
CVS Health is a pharmacy innovation company, with integrated offerings across the entire spectrum of pharmacy care. Retail pharmacy is 46% of revenue. Pharmacy services are 54%.
(3) Health Care falls back to Market Perform. Medical Care is Very Attractive, but Medical Products and Drugs are Very Unattractive. There’s quite a dichotomy here.
Company to look at: HealthSouth Corp. (HLS)
HealthSouth Corp. is one of the nation’s largest providers of outpatient surgery and rehab services. It provides services through both inpatient and outpatient facilities.
(4) Financials are Market Perform. The industry leaders are Consumer Finance and Real Estate, followed by Investment Funds and Investment Banking & Brokering. Stay away from the Major Banks.
(5) Industrials are Market Perform. The industry leaders are Airlines and Business Products. The big losers are Machinery and Metal Fabricating.
(6) Materials are Market Perform. The best industry is Containers & Glass.
(7) Consumer Staples is an Unattractive Sector. Tobacco, Food, Soaps & Cosmetics, and Misc-Staples all rank at the very bottom.
(8) Utilities are a Very Unattractive Sector.
(9) Energy is Very Unattractive. The one bright spot is Energy-Alternate Sources (i.e. Solar). The Coal industry, Oil E&P, Drillers and O&G Integrated industries are the very worst in all of the Zacks Industries this time around.
(10) Telco Services is a Very Unattractive Sector.
This article is an excerpt from John Blank's latest Zacks Market Strategy for February. To access the entire PDF, click here.
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