The market performance in the first half of 2015 compares unfavorably with the same periods in 2014 and 2013. Amid high volatility, the Dow failed to end in the green in 1H2015 while the S&P 500 managed to gain just 0.2%.
The Dow was the only benchmark in the first quarter to end in the red, but the S&P 500 joined the blue-chip index in negative territory in the second quarter. The S&P 500 thus ended its nine-quarter winning trend, but the Nasdaq managed to extend its winning streak to 10 quarters. The Nasdaq also hit an all-time high.
The year started with concerns related to lower global growth projections, a slump in oil prices, the strengthening of the dollar and apprehensions about the timing of a Fed interest rate hike. Amid this, GDP data had been of little help.
Beginning with a harsh winter and dismal earnings releases, economic data has been mixed in subsequent months. Meanwhile, an increase in bond yields remained a cause for concern through May. By the first week of May, the yield on the benchmark U.S. 10-year note touched its highest level for 2015.
Recently, however, retail and housing sector data have indicated strength. Fed officials, meanwhile, signaled a hike in interest rates, though at a slower-than-expected pace.
The major headwind for the market is the Greek drama. Greek debt negotiations have guided markets right from the beginning of 2015. On the last day of 1H2015, Greece defaulted on IMF repayments despite submitting a fresh two-year aid proposal to its creditors.
Synopsis of Monthly Performance & Key Events
Below we present the performance of the key benchmarks: the Dow Jones Industrial Average, Standard & Poor’s 500, Nasdaq Composite Index, and the fear-gauge CBOE Volatility Index (VIX):
|
Period |
Benchmarks (%) |
VIX (%) |
||
|
Dow |
S&P 500 |
Nasdaq |
||
|
Jan |
-3.7 |
-3.1 |
-2.1 |
9.2 |
|
Feb |
5.6 |
5.5 |
7.1 |
-36.4 |
|
March |
-2 |
-1.7 |
-1.3 |
14.6 |
|
April |
0.4 |
0.9 |
0.8 |
-4.8 |
|
May |
0.9 |
1.1 |
2.6 |
-4.8 |
|
June |
-2.2 |
-2.1 |
-1.6 |
31.7 |
|
1Q15 |
-0.3 |
0.4 |
3.5 |
-20.4 |
|
2Q15 |
-0.9 |
-0.2 |
1.8 |
19.2 |
|
1H2015 |
-1.1 |
0.2 |
5.3 |
-5.6 |
As evident from the chart, volatility has been very pronounced. Losses in January was followed by gains in Feb and then ended in the red again in March. Though markets managed small gains in April and May, they were back to the negative zone in June.
Focusing on June particularly, the losses for the Dow and S&P 500 were the largest since January. Also, all three benchmarks ended in the red in June, repeating the event last seen in March. Except for February, benchmarks have failed to post solid gains. In fact, it was February’s robust gains that had helped offset the losses in the first quarter and reduced the loss margin for 1H2015. Except for the Nasdaq, we do not have a benchmark performance to be particularly proud of.
Coming to the key events now — earnings, and data on GDP, nonfarm payroll, retail and housing — were the primary factors on the domestic front. Along with this, guessing the timing of the first rate hike has also swung markets. For international events, it has been predominantly the Greek drama with some inputs from China and Japan.
Earnings Affected by Strong Dollar
The US dollar achieved a 12-year high and had a meteoric rise against the euro early this year. This had led to calls for dollar-euro parity. However, the stronger dollar sparked concerns about the multinationals’ earnings numbers, as the stronger dollar was to impact exporters.
This was proved true, or at least the ‘dollar scapegoating’ was a theme in reading the first quarter results. Weakness in first quarter earnings numbers was attributed to dollar strength. The large-cap S&P 500 companies earn about 40% of their revenues from outside the US. Total first quarter earnings for the 498 S&P 500 members were up 2.4% on 3.3% lower revenues. Only 62% could beat EPS estimates and only 42.4% outperformed revenue expectations.
Not only the first quarter numbers, but fourth-quarter 2014 results released in January were also hit by oil prices, the U.S. dollar and global economic growth concerns. The three largest banks — JPMorgan Chase & Co. JPM, Bank of America Corp. BAC and Citigroup C — had posted their worst combined quarterly revenues since 2011.
IBM Corp. IBM, Google GOOGL and Microsoft MSFT also posted weak fourth quarter numbers. However other tech stocks fared better, with Netflix, Inc. NFLX and Facebook, Inc. FB comfortably surpassing estimates. Apple Inc. AAPL was the star performer, emerging unscathed to post record earnings of roughly $18 billion in fiscal first-quarter 2015.
GDP
The year did not start with impressive GDP numbers. Advance estimates in January had revealed that fourth quarter GDP increased at an annual rate of 2.6%, less than the consensus estimate of an increase by 3.6%. Eventually, the third estimate showed GDP increased at an annual rate of 2.2%, less than the consensus estimate of an increase by 2.4%.
The advance estimate for first quarter was again dismal. GDP was forecasted to have improved by 0.2%, less than the consensus estimate of an increase by 1%. Growth was hampered by harsh winter weather, cheaper oil prices and a stronger dollar. The second estimate showed contraction as GDP was estimated to have shrunk 0.7%. However, this was narrower than the consensus estimate of a 0.8% decline.
Strength in the U.S. dollar had a huge impact on the trade deficit over the first quarter. While a stronger dollar dragged down export demand in the first quarter, it also boosted imports.
As for the latest data, the first quarter GDP reading showed that the economy contracted in the first quarter at a slower pace than previously estimated. According to the “third estimate,” GDP contracted at an annual rate of 0.2% in the first quarter.
Employment Data
Nonfarm payroll data has been mostly encouraging. The U.S. economy created 257,000 new jobs in January, the 11th consecutive month in which the economy generated more than 200,000 jobs — its longest such stretch since 1994. Then, 295,000 jobs were added in February. Unemployment went down to six and a half year low of 5.5% in February.
However in March, 126,000 jobs were added, less than the consensus estimate of 247,000. Also, job additions fell below 200,000, bringing an end to the unbroken run of 12 such successive monthly gains. March’s figure was later revised down to 85,000. The employment data lifted mood again in April, when 223,000 jobs were added. The unemployment rate went down to a seven-year low figure of 5.4% in April from 5.5% in March.
In May, the US economy recorded the largest job additions since Dec 2014. A total of 280,000 jobs were created in May. The increase in hiring was widespread in May. However, the unemployment rate came in at 5.5% in May, marginally higher than the 5.4% recorded in April.
Retail & Housing Data
Adding to the positive housing reports released in May, housing data released last month reveal that the housing recovery is well and truly on track. While existing home sales in May surged at the highest pace since Nov 2009, May’s new home sales figure hit the highest level since Feb 2008.
U.S. homebuilder sentiment increased to a nine-month high in June. Among the latest additions, Pending Home Sales Index went up 0.9% to 112.6 in May. The rise in pending home sales in May was ahead of the consensus expectation of a 0.6% increase.
The latest retail reports have been encouraging to signal that the American consumer is willing to spend more. The increase in expenditure is being fueled by expectations of an increase in wage growth. Retail sales increased 1.2% in May. This rate of growth was significantly higher than April’s revised gain of 0.2%.
Meanwhile, the Thomson Reuters/University of Michigan’s final June consumer sentiment reading came in at 96.1, a five month high. The final reading was higher than the survey’s preliminary reading of 94.6.
Fed’s Rate Hike
A continuous market mover is the guessing game of the first rate hike. The nature of mixed economic data had somewhat restricted the Fed from giving a clear indication on the timing of the first rate hike. Also, there has been contradictory views, adding to volatility and shift in investor sentiment.
Minutes from the Federal Open Market Committee’s (FOMC) Apr 28-29 meeting had stated that officials opined a rate hike in June was “unlikely” as they remained concerned about weak economic growth in the first quarter.
However, now, the Federal Reserve signaled it will hike interest rates at a slower-than-expected pace. Fed officials said that the improving U.S. economy is strong enough to withstand one or two rate hikes this year. However, officials kept short term interest rates unchanged in the FOMC policy meeting. Fed members haven’t yet decided when to raise rates this year as the decision will depend on how the economy evolves.
Greece Crisis
This has been the biggest international event driving the markets this year. Negotiations between Greece and its creditors have continued through the year, but on the final day of the first half of 2015 the country defaulted on its debt repayment.
Looking back, Greece’s finance minister Yanis Varoufakis in January had rejected the country’s extended bailout program. February had begun on a tense note after the ECB cancelled its acceptance of junk-rated Greek government debts as security for regular central bank loans. Later in the month, Germany dismissed Greece’s plea for bridge funding until the end of May. Ultimately, Greece’s finance minister, Yanis Varoufakis and other Eurozone’s officials struck a deal regarding Greece’s bailout program.
Grexit concerns intensified again in May. Lingering uncertainty over striking a deal between Greece and its creditors dampened sentiment during the first week of June. Gains for stocks were limited during the second week due to the IMF halting negotiations with Greece.
Eurozone finance ministers failed to strike a deal with Greece over the country’s bailout program during the third week as well. Uncertainty over Greece’s bailout program led to daily deposit outflow of around one billion euros, which eventually led to the ECB approving an emergency loan to Greece’s banking system.
A breakdown in cash-for-reform talks between Greece and its lenders over the last weekend left the country teetering on the brink. Finally now, Greece has defaulted on IMF repayments despite submitting fresh two-year aid proposal to its creditors. The latest update is that Greece is appealing to Eurozone partners to ‘keep it afloat.’
5 Best Performing Stocks in 1H15
Amid the gloom, the Nasdaq has been a bright spot. Similarly, there are certain top Zacks Rank stocks that have done exceedingly well and negated broader markets’ concerns.
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 in 1H2015 greater than 35%
- 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.
- Market Cap greater than or equal to $1 billion
(See the performance of Zacks’ portfolios and strategies here: About Zacks Performance).
Here are the top 5 stocks that made it through this screen:
Conns Inc. CONN is a specialty retailer and sells major home appliances. They also sell home office equipment, lawn and garden products and bedding.
Price Change in 1H2015= 112.5%
P/E = 17.3x
This Year’s Estimated Growth = 35.9%
CONN holds a Zacks Rank #2 (Buy).
Valeant Pharmaceuticals International, Inc. VRX is a specialty pharmaceutical and medical device company. It develops, manufactures and markets a wide array of branded, generic and branded generic pharmaceuticals, over-the-counter (OTC) products.
Price Change in 1H2015= 55.2%
P/E = 19.98x
This Year’s Estimated Growth = 33.4%
Valeant Pharmaceuticals holds a Zacks Rank #2 (Buy).
Trinseo SA TSE is a global materials company and manufacturer of plastics, latex and rubber. The technology is used by customers in industries such as home appliances, automotive, building & construction and consumer goods, among others.
Price Change in 1H2015= 53.8%
P/E = 6.5x
Trinseo SA holds a Zacks Rank #1 (Strong Buy) and has estimated growth over 100%.
Nordic American Tankers Limited NAT is engaged of acquiring, disposing, owning, leasing and chartering double-hull tankers.
Price Change in 1H2015= 41.3%
P/E = 12.97x
Nordic American Tankers holds a Zacks Rank #1 (Strong Buy) and has estimated growth over 100%.
Qiwi plc QIWI operates as a provider of next generation payment services mostly in Russia, Kazakhstan, Moldova, Belarus, Romania and the U.S. It has an integrated network that enables payment services across physical, online and mobile channels.
Price Change in 1H2015= 38.9%
P/E = 18.7x
This Year’s Estimated Growth = 47.1%
Qiwi plc holds a Zacks Rank #1 (Strong Buy).
Going Forward
Obviously investors would prefer a better second half. Greece will continue to affect the mood, and the rate hike is most likely to come in the second half. GDP will most likely turn out to be positive hereafter and the labor data has already shown strength.
Retail will further add strength in the concluding months when festivals heat up. Housing market has already shown signs of a rebound, and except for temporary glitch they may not trend south. So, let’s hope for a profitable second half.
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