Despite a number of disappointing economic reports and the spectre of the Iraq crisis, benchmarks ended the month on a high. Encouraging comments from the Fed, stimulus measures from the ECB and bullish employment and housing data helped indices gain over the month. Mergers and acquisitions activities and a recovery in technology and small-cap stocks added to investor optimism.
For the month, benchmarks ended in the green. The S&P 500 registered its fifth successive month of gains. The index gained 1.9% in June. The Dow and the Nasdaq also gained 0.7% and 3.9%, respectively over the month. Gains in technology, media, financial and small-cap stocks during the month helped benchmarks end in the green. Optimism over the Federal Reserve’s commitment to keep interest rates low also boosted benchmarks.
Additionally, President Barack Obama’s decision not to send in ground troops into Iraq and European Central Bank’s stimulus measures had a positive impact on the benchmarks.
Meanwhile, hedge fund manager David Tepper’s comment that ECB’s moves partly “alleviated” his concerns about the market and news of Carl Icahn taking a 9.4% stake in Family Dollar Stores Inc. (FDO - Analyst Report) were other catalysts.
New corporate deals, such as those between Medtronic, Inc. (MDT - Analyst Report) and Covidien plc (COV - Analyst Report), The Hillshire Brands Co. (HSH - Snapshot Report) and Tyson Foods, Inc. (TSN - Analyst Report), and Merck & Co. Inc. (MRK - Analyst Report) and Idenix Pharmaceuticals Inc. lifted investor sentiment.
Investors were also encouraged by upbeat economic data. Encouraging data on industrial production, U.S. homebuilders’ confidence, May’s nonfarm payroll report and ISM manufacturing and services sector data added to the rally.
Final numbers showed that first quarter GDP contracted more than expected. GDP decreased at an annual rate of 2.9% during the first quarter, more than the consensus estimate of 1.8%.
First quarter GDP dropped the most since early 2009 when the recession was coming to an end. The previous estimate expected the U.S. economy to contract by 1.0% in the first quarter. In the fourth quarter 2013, the US economy had expanded 2.6%.
Mixed Economic Data
U.S. employment returned to its pre-recession peak for the first time in May. The nation recovered 8.7 million jobs lost during the recession. Unemployment rate stayed at 6.3% in May.
Producer Price Index dropped 0.2% in May. Separately, The Thomson-Reuters/University of Michigan preliminary June dropped to 81.2. The preliminary reading touched a three-month low. Benchmarks suffered their biggest weekly losses in two months following these reports.
On the other hand, encouraging data on manufacturing activity in the New York region, industrial production and U.S. homebuilders’ confidence added to the bullish sentiment.
But the effect of economic data on the bourses declined during the last week of the month. Positive economic data on existing home sales, new single-family home sales and an improvement in consumer confidence failed to drive benchmarks higher.
At the same time, investors ignored the biggest contraction of the U.S. economy in the first quarter since early 2009 and also overlooked an unexpected fall in durable goods orders.
The ECB Stimulus
The European Central Bank (ECB) announced several stimulus measures early this month, intended to boost Eurozone’s recovery. The central bank reduced the refinancing rate to 0.15% from 0.25% and the marginal lending facility rate was reduced to 0.40% from 0.75%. ECB also cut the deposit rates to minus 0.10%.
Additionally, ECB deployed a series of targeted long-term refinancing operations. Separately, ECB President Mario Draghi said preparations for outright purchases of asset-backed securities have started.
Comments from the Fed
St. Louis Fed president James Bullard’s comments on the timing of a rate-hike also rattled markets recently. Bullard said that he expects the central bank may hike interest rates by early 2015.
Earlier this month, the Federal Reserve kept its monetary policy “highly accommodative” and suggested there would be no immediate rate hikes. During its two-day policy meeting, the Federal Open Market Committee (FOMC) decided to remain committed to keeping interest rates low.
Federal Reserve Chairwoman Janet Yellen stated that the central bank will monitor a “wide range of indicators” to decide when to hike rates. She added there “is no mechanical formula” to help the Fed arrive at a decision on raising rates.
The Iraq Crisis
Concerns about oil supply disruption arose after unrest intensified across northern and central Iraq. Kurdish forces took control over the oil hub in Kirkuk after government’s troops failed to secure the area and abandoned their posts.
Escalating tension in Iraq has had a negative impact on benchmarks. Oil refinery stocks declined after The Wall Street Journal reported that the commerce department loosened the nearly 40 year ban on crude oil exports.
3 Star Performers for June
Here are the top 3 stocks for June that have the following features:
Percentage price change greater than or equal to 20%
Forward price-to-earnings Ratios (P/E) for the current financial year (F1) less than or equal to 25.
Expected earnings growth for the current financial year greater than or equal to 20%
Zacks Rank less than or equal to 2
Rio Alto Mining Limited (RIOM - Snapshot Report) is in the business of acquiring, exploring, and developing gold resources and advanced stage exploration projects in Peru and Latin America. The company is focused on the development of the La Arena gold/copper project, located in north central Peru. It also had prospects in Astrid and San Andres. Rio Alto Mining Limited is based in Canada.
Percentage price gain in June = 38.27%
Expected earnings growth for FY2014 = 23.53%
Rio Alto Mining holds a Zacks Rank #2 (Buy). The stock’s forward price-to-earnings Ratios (P/E) for the current financial year (F1) was 10.67 when trading ended on June 30.
Shire plc (SHPG - Analyst Report) is a specialty biopharmaceutical company catering to diverse medical needs through research and development, manufacture, sale, and distribution of pharmaceutical products. Shire repositioned its business in 2013 undertaking a realignment program with strategic focus on rare diseases and greater operational discipline. With an aim to reduce overlap, Shire has merged its three autonomous divisions into one.
Percentage price change in June = 35.16%
Expected earnings growth for FY2014 = 31.16%
The company holds a Zacks Rank #2 (Buy) and had a P/E (F1) of 23.86 when trading ended on June 30.
Christopher & Banks Corporation (CBK - Snapshot Report) is a is a Minneapolis-based specialty retailer of women's clothing providing exclusive fashions under the Christopher & Banks and C.J. Banks labels. The Company operated 543 stores as of June 10, 2014. It also operates two e-commerce websites for each of its brands.
Percentage price change in June = 29.23%
Expected earnings growth for FY2014 = 56.52%
Apart from a Zacks Rank #1 (Strong Buy), Christopher & Banks had a P/E (F1) of 24.81 when trading ended on June 30.
The Momentum for These Stocks Remain
The situation in Ukraine has improved considerably. The only global factor investors continue to be concerned about is the crisis in Iraq. The major fear on this front was the possibility of a jump in oil prices. However, petroleum prices have settled at lower levels following an early spike in the price of crude oil.
The Fed also remains committed to a low interest rate regime. In this context, the statement of a Fed official over the timing of a rate hike is probably a departure from the norm. All the indices also gained over the quarter and the first half of the year. Taken together, these are indications that the second half of the year may be a good one for the markets.