Markets enjoyed a month of spectacular gains powered by a strong earnings performance and hopes surrounding tax reforms. Significant progress was made on the new tax law during the month, further raising the hopes of investors.
Meanwhile, bullish tech earnings were the highlight of the thirdquarter earnings season characterized by notable revenue growth. The ECB cut its bond purchases but extended the duration of its monetary stimulus package.
October’s Performance
Last month, the Dow, the S&P 500 and the Nasdaq increased 4.3%, 2.2% and 3.6%, respectively. While, the Dow and the S&P 500 posted their seventh straight month in gains, this was Nasdaq’s fourth straight monthly gain. All the three benchmarks have posted their biggest monthly rise since February. Moreover, this also happens to be the Dow’s longest streak of such gains since April 2012 and also the longest for the S&P 500 since May 2013.
Meanwhile, the House of Representatives passed a $4.1 trillion budget bill for 2018. Moreover, the House of Representatives cleared the budget blueprint with majority of the Republicans voting in favor of the move.
Further, the ECB announced plans to extend the quantitative easing program. Also, the release of the Federal Open Market Committee minutes clearly hinted at a rate hike in December. President Trump chose not to certify Iran’s compliance with a nuclear deal struck in 2015.
Dow Breaches 23,000
The Dow gained 40.48 points on Oct 17 and surpassed the 23,000 psychological milestone in midday trading for the first time. This also marked the Dow’s fastest ascent to 1,000-point milestone since mid July. In its history spanning over a century, the Dow has registered the fourth 1,000-point increase within a year for the first time.
Economists believe that such a stellar showing by the blue-chip index has partially been due to optimism built around hopes of tax cuts after the new tax code was formulated by President Trump. Gains have also been in part due to a strong corporate earnings and broadly encouraging economic conditions.
Bullish Domestic Data
Economic data released during August was largely encouraging in nature. The ISM manufacturing index soared to 60.8% in September, up from 58.8%, marking its highest increase since 2004. ISM Services Index for September came in at 59.8%, marking its highest level since Aug 2005. Construction Spending surged 0.5% in the month of August, surpassing the consensus estimate of an increase of 0.2% for the period. With this, the index gained 2.5% from last year.
PPI for September increased by 0.4% while CPI increased by 0.5%. Retail sales in the United States for the month of September increased 1.6%, marking its highest increase in more than two years.
Consumer spending surged 1%, in September, marks its highest level in almost 8 years. Such a rally can be attributed to the fact that the residents of hurricane ravaged Texas and Florida replaced their flood-damaged automobiles.
First Estimate for Q3 GDP Looks Promising
The U.S. economy expanded at a solid 3% seasonally adjusted annual rate in the third quarter of 2017, according to Commerce Department data. Such an expansion came on the heels of 3.1% growth in the second quarter. It also marks the first time of two consecutive quarters of 3% growth or more since mid-2014 for the economy. However, the report did not specify as to how much of an impact hurricanes Harvey and Irma had on the growth of the economy in Q3.
Economists commented that the primary factor behind such a growth was an increase consumer spending, backed by broadly encouraging economic conditions and strong government outlays. The main engine of the economy grew at 2.4% over the quarter after a 3.3% gain in the second quarter.
Moreover, business investment increased 3.9% while inventories rose 0.7%. Also, the trade sector advanced by 0.4%. The PCE Price Index increased by 0.3%, logging an annual gain of 1.3% which was an improvement from the 0.9% pace recorded in the second quarter.
Hurricanes Cause Job Losses, Unemployment Slips
According to the Bureau of Labor Statistics, the U.S. economy lost about 33,000 jobs in the month of September. This marks the first time since 2010 that the economy has lost jobs within a month. Economists stated that two devastating hurricanes Harvey and Irma were the primary reasons behind such job losses.
Analysts commented that as many as 1.5 million people were out of jobs — the highest figure in last 20 years. The worst affected sector was the restaurant industry where as many as 105,000 people lost jobs. Meanwhile, the government raised its estimates on job openings in the month of August to 169,000 from 156,000 initially.
The unemployment rate decreased to 4.2% in September from 4.4% in August. The consensus estimate for the period showed that the unemployment rate would remain unchanged. Unemployment is now at its lowest level since 2000 and the report by BLS stated that the metric was not affected by the hurricanes.
Third-Quarter Earnings
Coming to third-quarter earnings, there is clear momentum on the revenue front, with growth notably accelerating from other recent periods. Total revenues for the 272 S&P 500 members that have reported results, as of Friday, Oct 27, are up 6.7% from the same period last year, which compares to 5.5% top-line growth for the same group of companies in the preceding quarter. (Read: All-Around Strength in Q3 Earnings Season)
Impressive third-quarter 2017 earnings by tech heavyweights such as Microsoft Corp. MSFT, Alphabet Inc. GOOGL, Amazon.com Inc. AMZN and Intel Corp. INTC have been the highlight of this earnings season. Shares of IBM IBM soared 9% on Oct 18, after the company posted better-than-expected earnings results. Shares of Netflix NFLX surged 1.6% on Oct 16, after the company reported strong third-quarter 2017 earnings.
Health care stocks were sent higher on Oct 17, by gains for Johnson & Johnson JNJ and UnitedHealth Group Incorporated UNH, shares of which gained 3.4% and 5.5%, respectively, after the two companies posted earnings beat in the latest quarter.
Among notable disappointments, JPMorgan JPM declined on Oct 12 after the company’s fixed income trading revenue dipped around 27% to come in at $3.2 billion in the third quarter of this year. Meanwhile, Citigroup C declined after the company’s cost of credit increased 15% due to global consumer banking as well as high credit reserve build. On Oct 24, shares of General Electric GE nosedived 6.3% after missing the third-quarter earnings estimate by a wide margin despite top-line growth.
Tax Reforms Make Progress
Around the end of September, President Trump and his aides unveiled tax reforms which effectively lower taxes on businesses and individuals. The proposal seeks to decrease the corporate tax rate from 35% to 20%. Moreover, the pass-through business taxes would be slashed to 25%.
In its first definitive move toward tax reforms, the House of Representatives passed $4.1 trillion 2018 budget legislation on Oct 5. However, a few members from President Trump’s team voted against the bill along with Democrats, objecting to parts of the tax reform proposal. The Democrats opposed the passage of the Bill, terming the move as "a vehicle for achieving partisan tax reform."
In a 51-49 vote late on Oct 19, the Senate approved the budget blueprint for fiscal year 2018. Such an outcome “unlocks” a procedure using which the tax code can be changed using only Republican votes. Moreover, the tax Bill can now be used to lower the projected revenue by almost $1.5 trillion over a ten-year period.
Ultimately, House of Representative passed the budget blueprint on Oct 27. Reports from Bloomberg surfaced on Oct 30 that legislators from the House who are involved in the formulation of the new tax code were considering a possible ‘phasing-in’ of the corporate tax-rate cut. This would effectively reduce the current rate of corporate tax — at 35% — to 20% by 2022.
FOMC Minutes
Minutes of the Federal Open Market Committee (FOMC), released on Oct 11 confirmed that a rate hike would take place in December, the third instance in 2017. Though, the Federal Reserve officials remained largely divided over raising interest rates, majority of the bankers vouched in favor of raising rates. The ones debating against increasing rates reasoned that hiking rates at a time when inflation is lower than the target of 2% might cause major setbacks for the U.S. economy.
After the meeting ended, the Fed chose to leave the interest rates unchanged in the range of 1-1.25% and decided to start unwinding its $4.5 trillion balance sheet. The much anticipated unwinding of the humungous balance sheet of the Fed was announced at the Federal Reserve Open Market Committee last month. The Fed is slated to begin the gradual unwinding process this month and plans to trim assets by $10 billion each month.
However, the Fed panel announced one rate hike before 2017 ends and three further hikes in 2018. Experts therefore speculate that this would come in December when Fed meets for the final time before the year ends.
4 Star Performers for October
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 20%
- 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 four stocks that made it through this screen:
Health Insurance Innovations, Inc. HIIQ operates as a developer and administrator of cloud-based individual health insurance plans and ancillary products.
Price gain over the last 4 weeks = 35.4%
Expected earnings growth for current year = 44.4%
Health Insurance Innovations holds a Zacks Rank #2 (Buy). The stock has a P/E (F1) of 13.01x.
Rocky Brands, Inc. RCKY is a leading designer, manufacturer and marketer of premium quality footwear and apparel.
Price gain over the last 4 weeks = 23.3%
Rocky Brands has a P/E (F1) of 17.58x and its expected earnings growth for the current year is more than 100%.The stock holds a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
LGI Homes, Inc. LGIH is engaged in the design and construction of entry-level homes across Texas, Arizona, Florida, Georgia, South Carolina, New Mexico, North Carolina, Washington, Colorado and Tennessee.
Price gain over the last 4 weeks = 20.6%
Expected earnings growth for current year = 30.1%
LGI Homes holds a Zacks Rank #2. The stock has a P/E (F1) of 13.31x.
Braskem S.A. BAK is a producer and seller of thermoplastic resins.
Price gain over the last 4 weeks = 20.1%
Braskem holds a Zacks Rank #1 and its expected earnings growth for the current year is more than 100%. The stock has a P/E (F1) of 10.35x.
Will the Winning Streak Continue in November?
Stocks have notched up record gains over October, setting several new milestones in the process. Powering these gains are expectations surrounding tax reforms and strong third quarter earnings results. Some of this momentum is likely to continue during the month of November. Economic data and GDP numbers in particular have also remained strong. Going forward the only likely impediment for markets are sluggish inflation levels and the initial reaction to the next rate hike. Barring a few minor hiccups over these issues, stocks will likely continue their record busting streak during November.
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