A variety of factors weighed on stocks as benchmarks ended the month with losses. International tensions dominated proceedings, as did comments from the Fed. An observation from Fed Chair Janet Yellen that Internet and biotech stocks may be overvalued sparked off fears among investors.
Meanwhile, the FOMC’s outlook on the economy was mixed. The committee said that while the economy continues to improve, the labor market and housing sector still showed signs of weakness. Some positive economic reports and earnings numbers provided optimism, but failed to outweigh the negatives.
For the month, benchmarks ended in the red zone. The S&P 500 and the Dow suffered their first monthly decline since January, declining 1.5% and 1.6%, respectively. The Nasdaq dropped 0.9%.
Escalating geopolitical tensions including the ones in Gaza and Ukraine unnerved investors. Benchmarks suffered their biggest losses in months on reports that a Malaysian Airlines passenger jet was shot down near Ukraine-Russian border. Concerns about the European banking system also dragged domestic benchmarks lower.
Benchmarks were also negatively impacted after a Fed monetary policy report sparked concerns about “substantially stretched valuations” in Internet and bio-tech stocks. Additionally, Federal Reserve Chairwoman Janet Yellen’s comment that federal funds rate might be raised sooner if the labor market keeps surprising the central bank dented investor sentiment.
Dismal corporate results by Caterpillar Inc. (CAT - Analyst Report), General Motors Co. (GM) and DR Horton Inc. (DHI) also weighed on benchmarks. Analysts took a dim view of The Boeing Company’s (BA - Analyst Report) results as they were concerned about the company’s cash flow and the rise in cost of its military tanker program.
Several companies also posted encouraging results. Facebook, Inc. (FB), Ford Motor Co. (F - Analyst Report), Apple Inc. (AAPL - Analyst Report), Citigroup Inc. (C - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report) reported upbeat quarterly performances. Earnings results from The Goldman Sachs Group, Inc. (GS - Analyst Report), Intel Corp. (INTC - Analyst Report), Morgan Stanley (MS - Analyst Report) and UnitedHealth Group Inc. (UNH - Analyst Report) were also encouraging.
The U.S. economy rebounded in the second quarter with GDP growth coming in stronger than expected. According to the “advance” estimate by the Bureau of Economic Analysis, the second quarter output of goods and services produced by labor and property located in the United States increased at an annual rate of 4.0%, more than the consensus estimate of an increase by 3.2%.
Second quarter GDP gained momentum, fuelled by improved consumer spending. Real personal consumption expenditure accelerated in spring by 2.5% following a 1.2% increase in the first quarter.
In addition to this, growth was boosted by a pickup in construction spending, increased business spending on equipment, a bigger buildup in inventories and slightly higher government spending.
This rise in second quarter GDP was in sharp contrast to first quarter’s decline in real GDP by 2.1%. First quarter GDP was revised from an earlier estimate of a decline of 2.9%. The US economy had contracted in the first quarter for the first time in three years. Harsh winter weather was cited for hampering business operations and slowing down construction.
Other Economic Data
Overall, economic data came in mixed. Manufacturing activity picked up in the U.S. The Institute for Supply management reported June PMI of 55.3%, indicating expansion in factory output for the 13th successive month.
Federal Reserve’s Beige Book stated that economic activity in all twelve Federal Reserve Districts expanded since the previous report. Additionally, the U.S. Producer Price Index (PPI) for finished goods and industrial production increased in June. Separately, the NAHB/Wells Fargo Housing Market index touched its highest level in July since January. Orders for durable goods in June also increased more than estimated. Existing home sales data hit the highest level in June since Oct 2013.
However, pending home sales numbers for June declined. Additionally, new home sales registered its biggest drop in almost a year. Home construction data was also weak. Housing starts fell to a nine-month low in June. Separately, U.S wholesale inventories rose less-than-expected.
Sanctions on Russia
The U.S. has extended its economic sanctions on Russia, following the Ukraine crisis. Additional sanctions will hit Russia’s energy, defense and finance sectors. New sanctions will also target Russia’s three state controlled banks and its shipping firms.
The European Union also announced a new round of sanctions against Russia. New sanctions restrict Russia’s largest banks from raising finances in European Union and place a trade bar on arms. They will also restrict export of military sensitive goods and equipment used in unconventional oil production to Russia. Developments on the Russian front continue to weigh on investors.
Fed Policy and Outlook
The Federal Open Market Committee (FOMC) in its two-day policy meeting gave no hints about the timing of an increase in the federal funds rate. The Federal Reserve said the rate hike may take “considerable time” after the end of its bond buying program.
Meanwhile, the FOMC stuck to its plan of steadily wrapping up the quantitative easing program by announcing another $10 billion cut to the bond-buying program. The monthly purchases of Treasury and mortgage-related assets now stand at $25 billion.
The central bank also said that “the likelihood of inflation running persistently below 2% has diminished somewhat” and inflation “has moved somewhat closer to the Fed’s longer-run objective.”
FOMC indicated that the economy has shown significant improvement in the second quarter as most of the economic indicators such as GDP, unemployment rate and inflation rate, were on track. However, it also said the labor market is facing problems of underutilization and the pace of recovery of the housing sector is slow.
3 Star Performers for July
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 3 stocks that made it through this screen:
CTPartners Executive Search Inc. (CTP) is an executive search company that offers its services globally and focuses on recruitment of high level executives, including board members. The company has 15 offices worldwide. CTPartners purchased Sydney based executive search company Johnson Executive Search in Mar 2014.
Percentage price gain over the last 4 weeks = 30.8%
CTPartners has significant expected earnings growth for FY2014 and holds a Zacks Rank #1 (Strong Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 16.95.
Gentiva Health Services Inc. offers skilled nursing and therapy services, paraprofessional nursing services and homemaker services primarily to adult and elderly patients through licensed and Medicare-certified agencies. It also provides services through specialty programs comprising Gentiva Orthopedics, Gentiva Safe Strides, Gentiva Cardiopulmonary, Gentiva Neurorehabilitation and Gentiva Senior Health. Furthermore, it offers hospice services and consulting services.
Percentage price change over the last 4 weeks = 20.1%
Expected earnings growth for FY2014 = 120.2%
Currently, the company holds a Zacks Rank #2 (Buy) and has a P/E (F1) of 19.62.
RF Micro Devices Inc. designs and manufactures radio frequency solutions. The company was a wide range of products which includes single-function components, integrated circuits and multi-chip models. RF Micro Devices operates through business divisions including a cellular products group and a multi-markets products group.
Percentage price change over the last 4 weeks = 20.6%
Expected earnings growth for FY2014 = 195.8%
Apart from a Zacks Rank #1 (Strong Buy), RF Micro Devices has a P/E (F1) of 12.7.
International Factors Hold the Key
The Dow and S&P 500 have closed the month with losses for the first time in seven months. The Nasdaq has also ended July in the red zone. This is cause for concern, since several key earnings reports have been on the positive side. Despite positive indications from important economic indicators some reports have been disappointing.
It seems that geopolitical concerns and international pressures have taken centre stage. The situation in Ukraine and Gaza and fears about the European economy continues to weigh on investors. The fallout of the Argentinean default has added to these concerns. Next month will indicate whether markets can ride out these concerns. In case these fears abate, the second half of the year could still be a good one for the markets.