Markets had a particularly dismal January, primarily due to a slump in oil prices and concerns about China’s economy. Most earnings reports failed to inspire confidence. Meanwhile, domestic economic data failed to inspire confidence in the economy. Sanctions on Iran were lifted, heightening concerns that the oil supply glut was set to intensify. The ECB promised further economic stimulus while the Bank of Japan lowered interest rate into negative territory.
January’s Performance
For the month, the S&P 500, the Dow and the Nasdaq declined 5.1%, 5.5% and 7.9%, respectively. While Dow and S&P 500 suffered their biggest monthly losses since Aug 2015, the Nasdaq declined the most since May 2010. Benchmarks ended the month in the red due to declines in energy and technology shares.
Disappointing economic data from China, including weak economic growth, dampened investor sentiment. Additionally, persistent oil supply glut, a stronger dollar and heightened tensions in the Middle East also adversely affected oil prices. Losses in consumer discretionary and biotech stocks also dragged benchmarks lower. Slowing growth in the U.S. also added to investor concerns.
However, deceleration in China’s economic growth raised hopes of further stimulus measures that eventually had a positive impact on the broader markets. Slower-than-expected rise in crude stockpiles and traders’ decisions to cover short positions also boosted oil prices.
China’s Economic Woes
Worries about China’s economy weighed on oil prices and stocks this month, especially for the first two weeks. Disappointing data on the country’s manufacturing sector dragged benchmarks lower on the first trading day of 2016. The People’s Bank of China injected short term funds worth 130 billion yuan ($19.9 billion) into the country’s financial system on the next day in order to stimulate its ailing economy.
Additionally, the country’s central bank guided the yuan to a five year low in off-shore trading, which raised expectations of further weakness in Chinese economy. However, China believes that this move to devalue its currency will boost its ailing export industries.
On the 7th, the People’s Bank of China made the largest downward adjustment to the yuan since August. Beijing’s move to allow the yuan to fall further against the dollar raised concerns about capital flight and the health of the world’s second largest economy.
Later in the month, a report revealed that China’s economic growth slowed down to 6.9% last year, its lowest level in 25 years. For the fourth quarter of 2015, the world’s second largest economy expanded at 6.8%, down from third quarter’s growth of 6.9%.
Iran Sanctions End
A landmark joint statement on Jan 16 heralded the end of sanctions on Iran which have prevented the oil rich country from exporting its output. The agreement immediately came into effect following a confirmation from the U.N. atomic agency.
Following the end of sanctions, the international oil glut is expected to intensify. This is expected to place further pressure on oil prices already undergoing a major slump.
Oil Prices Determine Market Direction
Prices of oil were the most important factor determining share movement last month. The price plunge continued, influenced by a widening demand supply chasm. The International Energy Agency said that markets will remain oversupplied this year, as supply vastly exceeds demand. The IEA also warned that Iran’s entry to the oil market, following the lifting of sanctions hasn’t been factored into prices yet.
The major factors which influenced prices through the month was the state of U.S. crude inventories, a stronger U.S. dollar and concerns about China’s economy. On the 7th, oil prices fell to 12 year lows on worries about future demand for oil from the world’s second biggest consumer. Worries about China continued to hamper oil prices and, in turn, stocks through the second week of the month.
Toward the end of the month, short covering powered a rebound in prices. Oil prices moved north on the 21st despite increase in weekly U.S. crude stockpiles. Slower-than-expected increase in oil supplies also boosted investors’ sentiment. Prices increased on the 22nd for the second consecutive day after the total number of U.S. drilling rigs decreased from 515 to 510.
Iran was another major factor determining oil price movement. On the very first trading day of the month, a rift between Iran and Saudi Arabia raised concerns about disruptions in oil prices. On the 25th, the oil ministry of Iraq reported that the country produced record volumes of oil in December. This development, combined with expectations of lower domestic demand created an oil price rout which affected energy shares.
Reports emerged on the 26th that major oil producing nations including Russia are likely to enter into a deal to limit their overall oil output. Hopes that oil supplies would fall helped prices of crude rise on four consecutive days. On Jan 28, Russia’s energy minister Alexander Novak reportedly said Russia will participate in a meeting with OPEC members in February in order to discuss production cuts.
ECB Promises Stimulus, BoJ Acts
Hints of further stimulus measures from European Central Bank (ECB) President Mario Draghi also fueled optimism among investors toward the end of the month. Draghi said officials will “review and therefore possibly reconsider” the bank’s monetary policy at their next meeting in March since uncertainty in global markets has raised downside risks.
Meanwhile Bank of Japan (BOJ) adopted a negative interest rate policy on Friday to ensure 2% inflation "at the earliest possible time." BOJ announced that it has cut key rate to -0.1% on excess reserves. The central bank kept the volume of purchase of government bonds and exchange traded funds (ETFs) flat.
Q4 GDP Declines
According to the “advance estimate” of U.S. Department of Commerce, fourth quarter GDP growth rate came in at 0.7%, in line with the consensus estimate. Fourth quarter GDP rate was lower than the 2% rate of growth in the third quarter. Lower consumer expenditure, falling exports and decline in business investment were the main reasons behind the slowdown.
Consumer expenditure increased at a slower pace of 2.2% in the quarter, compared to a 3% increase reported in the earlier quarter. Despite the slowdown in the fourth quarter, the economy is expected to expand at a pace of 2.4% in 2015.
Job Additions Jump, Unemployment Falls
The U.S. economy created a total of 292,000 jobs in December, beating the consensus estimate of 200,000. The tally was also higher than November’s revised jobs number of 252,000. It was revised up from last month’s reported figure of 211,000. October’s jobs numbers were also increased to 307,000 from 298,000, the biggest increase of 2015.
Meanwhile, the unemployment rate remained unchanged at 5% in December. The unemployment rate was in line with the consensus estimate. The average hourly earnings remained little changed at $25.24 per hour in December, while the consensus estimated a rise of 0.2%.
Dismal Domestic Data
Reports released through the month depicted a dismal economic picture. The ISM manufacturing index declined from November’s 48.6% to 48.2% in December, the lowest reading since the last month of the Great Recession. ISM services index and factory orders numbers were also disappointing in nature. Retail sales declined 0.1% in December, while the consensus had estimated it would remain unchanged.
Industrial production also declined for the third straight month in December. Both PPI and CPI declined. Core PCE declined in line with market expectations. The sole encouraging report was on auto sales, which hit an all-time high in 2015. Light-vehicle sales increased 5.7% year over year to an all-time record of 17.47 million units.
Mixed Housing Data
Housing data presented a mixed picture once again Construction spending declined 0.4% in November. Housing starts declined 2.5% in November. The S&P/Case-Shiller Home 10-city index increased 5.3% from the year-ago period in November, while the 20-city index rose 5.8%. The
On the positive side, existing Home Sales rebounded in December, gaining 14.7%. Sales for 2015 touched the highest annual level in nine years. The National Association of Home Builders (NAHB) homebuilders’ sentiment index remained steady at 60 in January.
New home sales spiked, increasing 10.8% from November to 544,000 in December, coming in above expectations. Pending Home Sales Index increased marginally, by 0.1%, from November to 106.8 in December.
Mixed Earnings Numbers
Fourth quarter earnings from Apple Inc. AAPL and Boeing Co.’s BA were major disappointments. Shares of Netflix, Inc.’s NFLX declined after it missed on revenues. Earnings from IBM Corp. IBM were mixed while Amazon.com’s AMZN disappointed investors.
In bank earnings, JPMorgan Chase & Co. JPM reported disappointing earnings numbers. Earnings from Bank of America Corp. BAC, Morgan Stanley MS and Citigroup Inc. C were also dismal in nature. In contrast, Wells Fargo & Company WFC reported earnings in line with estimates.
Meanwhile, earnings from Facebook, Inc. FB General Electric Co. GE, Verizon Communications Inc.’s VZ and Microsoft Corp. MSFT were encouraging in nature.
FOMC Keeps Rate Unchanged
After the conclusion of its two-day meeting, the Federal Open Market Committee (FOMC) stated that it will “closely monitor global economic and financial developments” before deciding on a rate hike in March. Meanwhile, the FOMC stated that the Fed is evaluating the implications of these events “for the labor market and inflation, and for the balance of risks to the outlook.”
Further, the Committee expects the inflation rate to remain below its target rate of 2% in the near future following continuing slump in energy prices. This left investors with little clue about whether the central bank will opt to hike rates in March after it kept the interest rate unchanged this month.
This had a negative impact on benchmarks. However, the committee said that the labor market was showing signs of improvement “even as economic growth slowed late last year.”
5 Star Performers for January
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 5 stocks that made it through this screen:
Transmontaigne Partners L.P. TLP is a refined petroleum products terminaling and pipeline company based in Denver, Colorado.
Price gain over the last 4 weeks = 44.2%
Expected earnings growth for current year =26.9%
Transmontaigne Partners has a Zacks Rank #2 (Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 12.69x.
LightPath Technologies, Inc. LPTH is a designer, developer, manufacturer and distributor of optical components and assemblies.
Price gain over the last 4 weeks = 34.1%
LightPath Technologies holds a Zacks Rank #2 and has a P/E (F1) of 19.19x. The company’s projected earnings for the current financial year is more than 100%.
Avid Technology, Inc. AVID is a developer, marketer and seller of a wide range of software and systems for creating and manipulating digital media content.
Price gain over the last 4 weeks = 25.9%
Expected earnings growth for current year = 32.2%
Apart from a Zacks Rank #1 (Strong Buy), Avid Technology has a P/E (F1) of 6.67x.
Teekay LNG Partners LP TGP is aprovider of marine transportation services for liquefied natural gas, crude oil and liquefied petroleum gas.
Price gain over the last 4 weeks = 20%
Expected earnings growth for current year = 24.7%
Teekay LNG Partners holds a Zacks Rank #2 and it has a P/E (F1) of 4.68x.
Arotech Corp. ARTX is a developer, manufacturer and marketer of security and defense products.
Price gain over the last 4 weeks = 17.7%
Apart from a Zacks Rank #2, Arotech has a P/E (F1) of 18.33x.The company’s projected earnings for the current financial year is more than 100%.
Rebound in February?
January has been an extremely cruel month for stocks. Oil prices have guided market movement for most of the month, along with China’s economic woes. Better news from China seems unlikely going forward. However, major oil exporting countries are trying to reach an agreement on reducing production. If this comes about, the price slump could be curbed in the near term.
Earnings reports have also been far from inspiring. What the markets need is a faster recovery on the domestic front. Economic stimulus from the ECB and the Bank of Japan will also help stocks move upward. The key to market direction next month could lie with domestic economic data. If most of these are on the positive side, stocks could yet return to their winning ways.
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