Wall Street bulls raged forward in the first three quarters of 2019 crossing several tough hurdles such as heightened trade conflict, global economic slowdown and government yield curve inversion along with a slowing U.S. economy and declining corporate profit. These are no small achievements after a disappointing 2018. However, as we are entering into the final quarter of this year, questions arise if this momentum will continue?
Impressive First Nine Months Despite Fluctuations
So far in 2019, Wall Street bulls are raging forward withstanding intermittent volatilities and fluctuations. Year to date, all three major stock indexes —- the Dow, the S&P 500 and the Nasdaq Composite —- have surged 15.4%, 18.7% and 20.6%, respectively.
In the just-concluded month, which several economists and financial experts described as tumultuous, stock markets closed in the green. The Dow, the S&P 500 and the Nasdaq Composite gained 2%, 1.7% and 0.5%, respectively. Notably, May and August are so far the only two months of this year when major indexes finished in the red.
Quarter wise performance of three major indexes:
| Index | 1Q | 2Q | 3Q |
| Dow 30 | +11.2% | +2.8% | +1.2% |
| S&P 500 | +13.1% | +3.4% | +1.2% |
| Nasdaq Comp. | +16.5% | +4.2% | -0.1% |
The table above shows that barring a marginal loss of Nasdaq Composite in the third quarter, all three major stock indexes finished in positive territory. However, the table also clearly shows that the pace of growth of the indexes declined significantly in the third quarter.
Meanwhile, CNBC reported an interesting trading pattern in September. Despite the presence of severe volatility, cyclical sectors aside from defensive sector like utilities. Out of 11 broad sectors of the S&P 500 Index, the energy sector gained 3.6% primarily owing to the Saudi Arabia-Iran geopolitical conflict resulting in global oil supply shortage.
However, the financial sector became the best performer in September advancing 4.5% in a low-rate scenario, in a major surprise. Moreover, both industrials and materials sectors gained 2.9% despite intensifying trade tensions and slowing global exports. Another major cyclical sector —- technology —- though gained moderately 1.4%, is so far the best performer in 2019 with a gain of nearly 30%.
Four Major Determinants of Q4
Performance of Wall Street in the fourth quarter of 2019 will largely depend on four factors:
First, trade-related developments will be the key to stock markets success in the fourth quarter and beyond. Fresh negotiation between the high-level delegations of the United States and China is scheduled to start from Oct 10. Even an interim trade deal can boost investors’ confidence. However, if negotiations break down again and tariff war restarts, Wall Street will face consequences the most.
Second, a dovish monetary stance adopted by the central bank since the beginning of this year has helped market participants to marginalize trade-related volatility. The Fed has already reduced the benchmark lending rate by 50 basis-points in two trenches. Another rate cut in December will further boost investors’ appetite for risky assets like equities.
Third, U.S. GDP declined from 3.1% in first quarter to 2% in the second quarter. Atlanta Fed has further lowered third quarter GDP estimate to 1.9%. However, better GDP data will confirm economic stability, which is growing for 11 years at a stretch.
Meanwhile, third-quarter earnings estimate is currently negative. Notably, the initial estimates of both first and second-quarter earnings were negative too. However, actual results were far better than the estimates. Similar results in the third quarter will have a strong positive impact on the stock market.
Finally, the fourth quarter of any year includes the U.S. holiday sales season. U.S. consumer spending, which accounts for nearly 70% of the GDP, bounced back in the second quarter. Thereafter, strong retail sales data of July and August confirmed a solid personal spending momentum. Strong fourth-quarter sales may give a major boost to GDP and stock markets.
Our Top Picks
At this stage, it will be prudent to invest in all those stocks that skyrocketed in 2019 and still have strong upside left. However, selection of these stocks can be problematic. Our VGM Score will come handy for investors to identify those stocks. We have narrowed down our search on five such stocks each carries a VGM Score of A and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Perficient Inc. PRFT provides information technology and management consulting services in the United States. It designs, builds, and delivers solutions using middleware software products developed by third-party vendors.
The company has an expected earnings growth rate of 26.4% for the current year. The Zacks Consensus Estimate for the current year has improved 3.1% over the last 60 days. The stock has jumped 73.3% year to date.
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Skechers U.S.A. Inc. SKX designs, develops, markets, and distributes footwear for men, women, and children; and performance footwear for men and women under the Skechers GO brand worldwide. It operates through three segments: Domestic Wholesale Sales, International Wholesale Sales, and Retail Sales.
The company has an expected earnings growth rate of 17.2% for the current year. The Zacks Consensus Estimate for the current year has improved 1.8% over the last 60 days. The stock has jumped 63.2% year to date.
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MasTec Inc. MTZ is an infrastructure construction company, which provides engineering, building, installation, maintenance, and upgrade services for communications, energy, utility, and other infrastructure primarily in the United States and Canada. It operates through five segments: Communications, Oil and Gas, Electrical Transmission, Power Generation and Industrial, and Other.
The company has an expected earnings growth rate of 34.2% for the current year. The Zacks Consensus Estimate for the current year has improved 11% over the last 60 days. The stock has soared 60.1% year to date.
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Rent-A-Center Inc. RCII leases household durable goods to customers on a rent-to-own basis. It operates through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. It offers durable products —- consumer electronics, appliances, computers, including tablets, smartphones, wheels and tires, and furniture.
The company has an expected earnings growth rate of 114.2% for the current year. The Zacks Consensus Estimate for the current year has improved 9.1% over the last 60 days. The stock has soared 59.3% year to date.
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RH RH operates as a retailer in the home furnishings. It offers products in various categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings.
The company has an expected earnings growth rate of 26.6% for the current year. The Zacks Consensus Estimate for the current year has improved 16.2% over the last 60 days. The stock has climbed 42.6% year to date.
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