This is an excerpt from John Blank’s full Market Strategy report. To access the full PDF, click here.
Welcome to January? It’s been a lousy start to a New Year. Chinese share markets opened trading on a chaotic note. China manufacturing PMIs showed contraction. Fear heightens the visible and less visible stress out there.
2016 may look like last year – 2015 clocked 0% returns. Europe and Japan ramped up QE. An oil rout, a Chinese renminbi re-set, EM recessions, and a strong USD reigned.
What compels U.S. optimism for 2016? U.S. jobs and better wages build confidence. Stock wealth. Demographics and policy build Health Care. U.S. house buying looks strong.
What’s alive for pessimists? Here is some pessimism for you. The average year-end 2016 target for the S&P 500 for 10 Wall Street strategists surveyed by MarketWatch is lower than the average of their original 2015 targets.
At this time last year, Wall Street strategists pegged the S&P 500 ending 2015 with an average of 2,201. For the end of 2016, those same analysts have an average S&P 500 target of 2,193.
Global Uncertainty Has Increased
On top of that, the Fed’s economists in San Francisco wrote at length on global uncertainty. It has increased in the last half of the year.
Measures of financial uncertainty based on stock market volatility in both the United States (VIX) and the Euro area (VSTOXX) rose in response to recent events including the Greece bailout referendum in July, China’s stock market crash in August, and the Paris terrorist attacks in November.
However, the Fed says the levels of uncertainty in both the U.S. and the Euro area remained below their prior peaks during the global financial crisis in 2007-09 and the onset of the European debt crisis in 2011.
Global Manufacturing Growth Slowed in 2H-2015
It’s not all doom and gloom. But it’s close. Europe showed some manufacturing growth. Cost competitiveness rose there on the back of a cheap euro currency.
Here is what Markit’s Chief Economist had to say—
“Global manufacturing growth slowed at the end of 2015, ending the worst year since 2012. European countries led the growth rankings, as emerging Asia suffered its worst downturn in more than ten years of data collection.
"The JPMorgan Global Manufacturing PMI™, compiled by Markit, fell from 51.2 in November to 50.9 in December, its lowest reading for three months. The survey data are consistent with global manufacturing output expanding at a modest annual pace of just over 1%.
"At 51.2, the average PMI reading for 2015 is down from 52.3 in 2014 and the lowest – albeit by a small margin – since 2012, a year in which global manufacturing suffered a slight decline.
"In all, 14 of all 25 countries covered by Markit PMI surveys saw their manufacturing economies expand in 2015, according to average PMI readings, while 11 reported deteriorating business conditions.”
Zacks Sector/Industry/Company Telescope
Marching on tune, as a New Year emerges, the EPS growth outlook doesn’t look too hot either.
Share markets remain solely bullish on two select sectors — Health Care and Info Tech. EPS growth promise is found mainly within Medical Care and Semiconductors. That’s a small group of companies for long investors to play. These stocks are well bid already.
(1) Health Care is Attractive. Focus on Medical Care particularly. Other industries hover at Market Weight.
Zacks #1 Rank (Strong Buy) Pick: Cerner Corp (CERN)
CERNER CORP. designs, develops, markets, installs and supports information technology and content solutions for healthcare organizations and consumers that are capable of being implemented on an individual, combined or enterprise-wide basis and are accessible over the internet by consumers, physicians and healthcare providers.
(2) Info Tech looks Attractive. The Semiconductors lead the way, followed by Computer Software-Services.
Zacks #1 Rank (Strong Buy) Pick: Mellanox Technologies (MLNX)
MELLANOX TECHNOLOGIES is a leading supplier of semiconductor-based, interconnect products to world-class server, storage, and infrastructure OEMs servicing Fortune 500 data centers, the world's most powerful supercomputers, and mission critical embedded applications.
(3) Consumer Discretionary falls to a Market Weight. The sold leader is Publishing, which is not a big industry. Non-Food Retail/Wholesale also looks solid.
Zacks #1 Rank (Strong Buy) Pick: GNC Holdings (GNC)
GNC HOLDINGS, INC. operates as a specialty retailer of nutritional products including vitamin, mineral, herbal and other specialty supplements and sports nutrition, diet and energy products.
(4) Telcos are a Market Weight.
(5) Utilities are a Market Weight.
(6) Financials are a Market Weight. The Attractive industries are Banks & Thrifts and Real Estate. Insurance industries have fallen back. That says the cyclical game is largely played out.
(7) Energy is now a Market Weight. The Oil-Misc industry, with its refiners and gas stations is strong. Energy-Alternates, with the strong Paris climate accord, is strong. Oil & Gas Drilling and the big integrated companies remain in the tank.
(8) Industrials are Unattractive. The leader is solely the Airlines. Railroads, Machinery-Electrical, Machinery and Metal Fabricating are getting clobbered.
(9) Consumer Staples looks Very Unattractive in January. The strong spot is solely Food/Drug Retail, as Gasoline prices collapse further. The Agri-Business, Food, Soap & Cosmetics and Beverages industries look awful.
(10) Materials remain Very Unattractive. The worst are Metals-non-Ferrous, Chemicals and Paper.
Conclusion: Markets Can Climb a Wall of Worry
Islands of EPS growth look sparse these days. The U.S. saw its first rate hike last December. 2 to 4 more could come in 2016.
Outside the U.S., the world economy faces a medley of deepening shocks. Foremost is the oil and materials price collapses. Chinese manufacturing stagnation is raising red flags over that nation’s finances. Then, there is Brazil.
And then? And then? Oh that’s right! Markets can climb a wall of worry.
This is an excerpt from John Blank’s full Market Strategy report. To access the full PDF, click here.
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