Markets experienced a dismal month, weighed down by concerns about China and uncertainty over the timing of a rate hike. The world’s second largest economy continued to be a cause for concern. In fact, investor fears were heightened following continual stock market losses.
A slump in oil prices also weighed on energy stocks before a rebound in prices late in the month. Positive GDP and jobs data lifted stocks. However, uncertainty about the timing of the rate hike also led to benchmarks closing in the red.
For the month, the S&P 500, the Dow and the Nasdaq plunged 6.3%, 6.6% and 6.9%, respectively. While the Dow notched up its biggest monthly decline in more than five years, the S&P 500 and the Nasdaq registered their steepest monthly losses since May 2012. All the major indexes moved in and out of their correction territory to end a volatile month in the red.
Benchmarks slumped for the month on concerns that a weak Chinese economy would result in a global slowdown. Benchmarks also closed in the red, following the yuan’s devaluation. Uncertainty about the timing of a Fed rate hike was another major cause for the losses.
GDP Improves, Beats Expectations
According to the second estimate by the Bureau of Economic Analysis, the second quarter output of goods and services increased at an annual rate of 3.7%, more than the consensus estimate of an increase by 3.2%. This rise in second quarter GDP was more than the first quarters’ increase in real GDP of 0.6%.
Second quarter GDP gained momentum, boosted by improved consumer spending. Real personal consumption expenditure, which accounts for more than two-thirds of U.S. economic activity accelerated in spring by 3.1% following a tepid 1.8% increase in the first quarter. Cheaper gasoline prices and a strong labor market increased household wealth, which eventually boosted consumer spending.
Separately, real gross domestic purchases also increased 3.4% in the second quarter, more than the 2.5% increase during the first three months of this year. In addition to this, growth was boosted by a pickup in construction spending, increased business spending on equipment, a bigger buildup in inventories and higher government spending.
Unemployment Rate Flat
The U.S. economy created a total of 215,000 jobs in July. The tally was less than June’s upwardly revised job numbers of 231,000. However, the unemployment rate in July remained unchanged from June’s seven-year low rate of 5.3%. The consensus estimated unemployment rate to increase to 5.4%.
Meanwhile, the average hourly earnings gained 0.2% in July from previous month’s figure to $24.99 per hour, in line with the consensus estimate.
Positive Domestic Data
Some crucial economic reports were on the positive side. This includes factory orders, ISM services index and durable orders. Retail sales increased 0.6% in July, in line with the consensus estimate. Additionally, June data was revised from a 0.3% decline to reflect that sales had remained nearly flat.
Industrial production increased 0.6% in July, higher than the consensus estimate of 0.1%. This was also better than the 0.1% increase reported in June, revised downward from the original estimate of a 0.3% increase. This was the second successive increase following five month-over-month declines and the largest increase in eight months.
However, other reports such as the ISM Manufacturing Index, construction spending and personal consumption were disappointing in nature. Jobs and GDP data were on the positive side, but inflation continues to remain a cause for concern.
Housing Sector Shines
The housing industry is steadily picking up pace as evident from the numbers released last month. Housing starts rose 0.2% in July to a seasonally adjusted annual rate of 1.21 million last month, the highest since October 2007. Starts on single family houses surged 12.8% last month.
Additionally, the National Association of Realtors reported that its pending home sales index increased 7.4% year-over-year in July. Sales of new homes surged 26% last month, compared with July last year. Also, the National Association of Home Builders reported that homebuilder sentiment rose to its highest level since November 2005.
A steep decline in TV-subscribers weighed on the earnings results of major media companies including Viacom, Inc. (VIAB - Free Report) . Shares of Viacom plunged 14.2% after reporting third quarter fiscal 2015 adjusted net income from continuing operations of $591 million or $1.47 per share compared with $618 million or $1.42 in the prior-year quarter. The adjusted earnings figure missed the Zacks Consensus Estimate by a penny. Meanwhile, total revenue in the quarter stood at $3,058 million, down 11% year over year and below the Zacks Consensus Estimate of $3,282 million.
Separately, disappointing results from The Walt Disney Company (DIS - Free Report) and Wal-Mart Stores Inc. (WMT - Free Report) weighed on the blue-chip index. Walt Disney posted quarterly revenues of $13,101 million, lower than the Zacks Consensus Estimate of $13,169 million. However, earnings per share of $1.45 beat the Zacks Consensus Estimate of $1.39
Wal-Mart's fiscal second quarter 2016 earnings of $1.08 per share missed the Zacks Consensus Estimate of $1.12. Additionally, earnings per share for fiscal 2016 are now expected to be in the range of $4.40 - $4.70, down from the previous guidance of $4.70 - $5.05.
China Fears Spook Markets
Several economic indicators from China signaled the slowdown may be deepening. Data on manufacturing was disappointing in nature, indicating underlying China’s economic weakness. Producer prices declined to the lowest level in six years in July. Additionally, exports recorded a greater than expected decline.
Dismal data aggravated losses for China stocks which weighed on investor sentiment in the U.S. On Aug 21, the blue-chip index nosedived, declining 3.6% after a volatile trading session. This was a result of investors’ concerns about the adverse effects of a slowdown in China’s economy. The Shanghai Composite Index tanked 8.5% to close at 3,209.91 on the same day. China’s main stock index moved into the red for the year, while it plunged almost 38% from its peak in mid-June.
In its latest move to prop up markets and the economy, the People’s Bank of China (PBOC) decided to cut interest rates for the fifth time since November. The apex bank will cut one-year lending rate to 4.6% from 4.85%, while the one-year deposit rate will be lowered to 1.75% from 2%.
The PBOC also decided to reduce reserve requirement ratio for all banks from 18.5% to 18%. This will pump around 678 billion yuan or about $105.9 billion into the Chinese economy. However, investors remained unconvinced about whether these measures would be able to prop up the economy.
Oil Prices Rebound
The oil slide continued for most of the month before staging a dramatic rebound last week. Last Monday, slump in Chinese shares resulted in a selloff of global stocks including oil and other commodities. Price of WTI crude oil finished below $39 a barrel for the first time since Feb 2009. Additionally, price of Brent crude oil fell below the $43 mark for the first time since Mar 2009.
However, price of WTI crude oil soared $3.96 or 9.3% to $42.56 per barrel on Thursday. Meanwhile, WTI crude oil price registered its largest one day percentages gain since Mar 12, 2009.
Additionally, Brent crude surged $4.42 or 9.3% to $47.56 per barrel. Brent crude prices also posted its largest one day percentage gain since Dec 31, 2008. Both WTI and Brent up their largest one day dollar gains in three years. Oil prices drew strength after short sellers started buying oil companies, banking on upbeat GDP data.
As a result, crude futures logged a monthly gain of 4% in August, settling at $49.20 per barrel - their highest point in almost 6 weeks. The trigger for the rally was a report that Venezuela may be pushing the OPEC cartel to hold an emergency meeting to discuss the possibility of production cuts and halt the oil price rout.
The latest weekly U.S. government report showing a surprise decline in crude supplies and the recent turn of events in Yemen – raising concerns over stability in the Middle East – also provided support.
Minutes of the Federal Open Market Committee (FOMC) meeting held on Jul 28 and 29 revealed that the majority of policymakers “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.” Certain participants believed “incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2 percent over the medium term.”
Additionally, it said that “The recent decreases in oil prices and the possibility of adverse spillovers from slower economic growth in China raised some concerns.” Market watchers opined that the dovish tone of the minutes implied that a rate hike in September was unlikely.
Rate Hike Uncertainty
Several market watchers are convinced that a September rate hike is mostly unlikely. Last Wednesday, New York Federal Reserve President William Dudley said that a September rate hike is “less compelling.” Given the slowdown in China’s economy, decline in commodity prices and volatility in financial markets, he said, an increase in interest rates next month will be less appropriate.
Federal Reserve Vice Chairman Stanley Fischer’s comments on Friday intensified the rate hike debate. According to him, a September rate hike was “pretty strong” before China devalued its currency. He said that China’s devaluation “is relatively new and we’re still watching how it unfolds.” He added: “We’ve got time to wait and see the incoming data and see what is going on now in the economy” before deciding on hiking rates.
5 Star Performers for August
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 10%
- 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 top 5 stocks that made it through this screen:
AeroCentury Corp. (ACY - Free Report) is an operating lessor and finance company which specializes in leasing used turboprop aircraft and engines.
Price gain over the last 4 weeks = 39.2%
Expected earnings growth for current year = 87.7%
AeroCentury holds a Zacks Rank #1 (Strong Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 10.61.
Central Garden & Pet Company is a leading producer and marketer of premium and value-oriented products focused toward the lawn & garden and pet supplies markets in the U.S.
Price gain over the last 4 weeks = 31.1%
Expected earnings growth for current year = 95.5%
Central Garden & Pet Company holds a Zacks Rank #2 (Buy) and it has a P/E (F1) of 19.01x.
LGI Homes, Inc. (LGIH - Free Report) is engaged in the design and construction of entry-level homes across Texas, Arizona, Florida and Georgia.
Price gain over the last 4 weeks = 28.8%
Expected earnings growth for current year = 66.8%
Apart from a Zacks Rank #1 (Strong Buy), LGI Homes has a P/E (F1) of 11.65x.
NCI, Inc. is a leading provider of information technology services and solutions to U.S. federal government agencies.
Price gain over the last 4 weeks = 27.2%
Expected earnings growth for current year = 27.7%
NCI, Inc. holds a Zacks Rank #2 (Buy) and it has a P/E (F1) of 17.74x.
U.S. Concrete, Inc. (USCR - Free Report) operates as a provider of ready-mixed concrete and concrete-related products and services to the construction industry in the U.S.
Price gain over the last 4 weeks = 22.7%
Expected earnings growth for current year = 57.3%
Apart from a Zacks Rank #2 (Buy), U.S. Concrete has a P/E (F1) of 16.54x.
Can Stocks Rebound in September?
At this point, two major concerns are pulling stocks lower. The state of China’s economy is a major cause for concern, since stocks continue to trend lower. Indications have emerged that the state may withdraw measures to boost the bourses, heightening investor fears.
Meanwhile, conflicting signals from the Fed have emerged on the possibility of a rate hike in September. In keeping with earlier comments from the central bank, this decision will likely be data driven. This week’s employment data will be an important factor in this regard. Whether the markets have priced in the possibility of a rate hike will largely determine the direction of stocks going forward.
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