Wall Street is reeling under severe volatility in May. Month to date, the market's benchmark — the S&P 500 Index — and the tech-heavy Nasdaq Composite are down 1.6% and 4.7%, respectively, while the Dow is up by a mere 21.2 points. Market's fear gauge — the CBOE VIX — has jumped 19.2% and ended above 22 on May 20 for the first time since Mar 10.
Last week, these three major stock indexes recorded their worst weekly performance since Feb 26. Notably, the Dow, the S&P 500 and the Nasdaq Composite are down 1.4%, 1.4% and 1%, respectively, so far this week.
The soaring volatility in May is solely due to investors' concern of an impending inflation that may compel the Fed to change its ongoing easy-money stance. However, the recent inflationary expectation is nothing but a faster-than-expected recovery of the U.S. economy. The economic fundamentals remain very strong. At this stage, it makes good sense to buy those stocks on the dip that could prove to be valuable once the rally resumes.
Inflationary Expectations Trigger Volatility
The U.S. economy is currently facing challenges of both demand-pull and cost-push inflation. The great reopening of the economy buoyed by the nationwide deployment of COVID-19 vaccines, record-breaking savings due to lockdown-imposed restrictions, massive fiscal and monetary stimulus and robust pent-up demand have resulted in demand-pull inflation.
The consumer price index (CPI) — popularly known as household inflation — jumped 4.2% year over year in April, its highest since September 2008. The core CPI (excluding volatile food and energy items) surged 0.9% in April after gaining 0.3% in March, marking the largest monthly gain since 1981.
The pandemic-led disruptions in the supply chain system resulted in a shortage of inputs, especially high-end chipsets, among final product manufacturers. This in turn raised the prices of inputs that forced producers to increase prices of the final products.
Moreover, the shortage of skilled manpower forced businesses to increase wages and other benefits to attract laborers to meet the growing demand for their products. The average hourly wage rate increased 0.7% in April compared with a 0.1% drop in March.
Economic Fundamentals Remain Strong
The U.S. economy is witnessing an impressive recovery since the beginning of 2021, faster-than-expected by a large number of market participants. The vaccination drive on a priority basis and an unprecedented stimulus helped the economy to ramp up the level of activities.
Weekly jobless claims have fallen significantly in the past four reported weeks, while manufacturing and services' activities picked up and are facing shortage of skilled manpower to raise their level of production.
Robust pent-up demand supported by an astonishing $2.3 trillion personal savings and expectations of record-high corporate profits and GDP growth in 2021 are all indicating that the U.S. economy is rock solid and Wall Street is the best place for investment.
Our Top Picks
At this stage, investors should be prepared to minimize fluctuations in their portfolio and consequently rebalance it with suitable financial assets to maintain stability. Thus, it would be prudent to pick up value stocks with a favorable Zacks Rank.
We have narrowed down our search to five such stocks. All these stocks provided higher returns than the S&P 500 in the past month. Each of our picks carries a Zacks Rank #1 (Strong Buy) and a Value Score of A or B. You can see
. the complete list of today’s Zacks #1 Rank stocks here
The chart below shows the price performance of our five picks in the past month.
L Brands Inc. operates as a specialty retailer of women's intimate and other apparel, personal care, and beauty and home fragrance products. It operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International.
The forward price-to-earnings ratio (P/E) for the current financial year is 12.41X, lower than the S&P 500 average of 21.8X. It has a PEG ratio of 0.95, lower than the S&P 500 average of 2.2. The company has expected earnings growth of 56.9% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 12% over the last 7 days.
Dillard's Inc. ( DDS Quick Quote DDS - Free Report) operates retail department stores in the southeast, southwest, and Midwest areas of the United States. Its stores offer merchandise, including fashion apparel for women, men, and children, and accessories, cosmetics, home furnishings, and other consumer goods.
The forward P/E for the current financial year is 11.38X, lower than the S&P 500 average. It has a PEG ratio of 0.47, lower than the S&P 500 average. The company has expected earnings growth of more than 100% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 7 days.
PulteGroup Inc. ( PHM Quick Quote PHM - Free Report) is engaged in the homebuilding and financial services businesses, mainly in the United States. It conducts operations through two primary business segments –- Homebuilding and Financial Services.
The forward P/E for the current financial year is 7.33X, lower than the S&P 500 average. It has a PEG ratio of 0.77, lower than the S&P 500 average. The company has expected earnings growth of 47.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 25.1% over the last 30 days.
Reliance Steel & Aluminum Co. ( RS Quick Quote RS - Free Report) is a leading metals service center company engaged in value-added materials management and metals processing services. It distributes over 100,000 metal products to more than 125,000 customers across a vast spectrum of industries.
The forward P/E for the current financial year is 12.43X, lower than the S&P 500 average. It has a PEG ratio of 1.38, lower than the S&P 500 average. The company has expected earnings growth of 73.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 30.1% over the last 30 days.
Westlake Chemical Corp. ( WLK Quick Quote WLK - Free Report) is a vertically integrated international producer and supplier of petrochemicals, polymers and building products. It operates through two segments, Vinyls and Olefins.
The forward P/E for the current financial year is 11.29X, lower than the S&P 500 average. It has a PEG ratio of 0.82, lower than the S&P 500 average. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 28.4% over the last 30 days.
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