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Hidden Plots: They Scare Stocks, Raise Oil and Flatten Inflation

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The following is an excerpt from Zacks Chief Strategist John Blank’s full Dec Market Strategy report To access the full PDF, click here.

Inside Zacks’ fresh December Market Strategy outlook, I relay four topics:

(A)  An Impeachment May or May Not Influence Stock Returns

(B)  OPEC’s New “Declaration of Cooperation Has Lifted Global Oil Prices

(C)  The Fed Now Focuses on a Medicare Payment Freeze… to Explain Low Inflation

(D)  Finally, Rising Earnings Estimates for Energy, Industrials and Financials

Policy and politics! That’s the hidden reality I see is summarized in Latin as “Deus Ex Machina,” or “The God in the Machine."

That term has evolved to mean a plot device, whereby a seemingly unsolvable problem is suddenly and abruptly resolved, by an inspired and unexpected intervention.

In other words, look more closely into this market’s drivers. You often see an unexpected central force operating.

Policy makers of the world have indeed been the hidden and less-discussed movers and shakers -- upon the stock markets, on oil prices and in U.S. consumer inflation staying down.

(A) An Impeachment May or May Not Influence Stock Returns

Many investors worry the U.S. stock market will react negatively to a possible impeachment of President Trump, as it did following President Nixon’s firing of Archibald Cox, the Watergate special prosecutor, in October 1973.

Sam Stovall, former chief investment strategist at Standard & Poor’s for 27 years, has stated, “Investors are now concerned that President Trump will be impeached and are looking warily at historical precedent.”

Read on for details

(B) OPEC’s New “Declaration of Cooperation” Has Lifted Global Oil Prices

Why are global oil prices rising again?

As a part of a process of cooperation, OPEC and participating non-OPEC countries met again in early December 2017.

The 14 members of OPEC, along with 10 oil states outside of the cartel, reached an agreement to limit oil output until the end of 2018. This decision comes after what has already been more than a year of production cuts. This new deal --wider and more inclusive than one running since the beginning of 2017-- extends to Nigeria and Libya.

WHAT OPEC WROTE: Over the years 2014 through 2016, global oil inventories grew rapidly, as global oil supply outpaced world oil demand. During the same period, the crude futures’ forward curve flipped into a prolonged contango for the first time since 2010, providing an economic incentive to store significant volumes of crude at sea.

By February 2016, OECD commercial stock levels – a key indicator of the state of the oil market – reached a record-high of more than 380 million barrels over the five-year average, indicating the huge excess of supply in the market.

The landmark production adjustment decision taken by the OPEC and non-OPEC participating oil producing nations at the end of 2016, known as the Declaration of Cooperation, together with its renewal in May 2017, were necessary responses to the urgent need to bring forward market rebalancing.

Read on for details…

(C) Fed Focuses on a Medicare Payment Freeze… to Explain Low Inflation

A major contributor to low inflation is the health-care services sector, which currently makes up about one-fifth of core personal consumption expenditures and tends to be relatively insensitive to economy-wide conditions.

Health-care services inflation has declined steadily, falling from an average above 3.0% in the mid-2000s to close to 1.0% over the past five years. 

The decline in health-care services inflation is mainly attributable to ongoing mandated cuts to Medicare payment growth, which also tend to affect payments in the private health-care market.

Medicare payments to hospitals, for example, have been flat for the past five years. Some of the payment growth cuts are permanent, which are likely to cause some continued drag on inflation in the future, despite a strengthening economy.

 

Again, read on for details…

(D) A Rise in Earnings Estimates for Energy, Industrials and Financials

Zacks DEC Sector/Industry/Company Telescope

December Zacks sector and industry ranks show the internal movement in the U.S. and global economy by what sectors are rising and falling.

The rising sectors this month, compared to November: Industrials, Energy, Financials, and at the back, Telcos and Utilities.

The falling sectors: Materials and Health Care.

That shows the trader that the top new sector spots for a trading position are likely found in Industrials, Energy and Financials.  Tax cut benefits help Financials, and oil prices are moving higher. Construction and machinery buying is moving up, as full employment pushes up against space constraints.

Info Tech stays HOT. Yet, that ongoing strength has overheated the valuations in that sector, particularly on the semis. A share price correction underway here is overdue. But the semis are the top overall earnings growth industry, once again.

(1) Info Tech stays HOT, and Very Attractive. Semiconductors are the leader of ALL industries across the board, again, in December. Computer Software-services is also strong.

Hot Zacks #1 Ranked Stock: Intel Corp. (INTC - Free Report) )

(2) Consumer Discretionary stays Very Attractive. Leaders are Other Cons-Discretionary, Autos-Tires-Truck, Apparel and Leisure.

Hot Zacks #1 Ranked Stock: Polaris Industries (PII - Free Report)

(3) Materials fall to Attractive from Very Attractive. The leaders are Metals Non-ferrous and Chemicals.

Hot Zacks #1 Ranked Stock: Boise Cascade (BCC - Free Report)

(4) Industrials rise to Attractive from Unattractive. The leaders are Machinery, Construction-Building Services, Pollution Control and Business Services.

(5) Energy rises to Attractive from Market Weight. Oil & Gas Integrated and Alternates lead.

(6) Health Care falls to Market Weight from Attractive. The leader is Medical Products.

(7) Financials rise to Market Weight from Unattractive. The sole strong spot is Investment Banking & Brokering.

(8) Consumer Staples stays Unattractive. The sole bright spot is Agri-business.

(9) Telco Services rise to Unattractive from Very Unattractive.

(10) Utilities rise to Unattractive from Very Unattractive.




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Polaris Industries Inc. (PII) - free report >>

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Boise Cascade, L.L.C. (BCC) - free report >>


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