Markets traversed a turbulent month, marked by concerns over a Brexit and the Fed’s reluctance to hike rates. Ultimately a Brexit did occur, resulting in short term losses for stocks. Additionally, the Fed’s reluctance to hike rates and indications that a low interest rate regime was likely to continue led to concerns about the economy. The Fed’s decision was largely an outcome of a weaker labor market, though Brexit concerns also played their part.
For the month, the Dow increased 0.8%, while the S&P 500 ended marginally lower and Nasdaq declined 2.1%. Utilities sector was the biggest gainer for the month, while financial services were the biggest laggards.
Investors remained cautious for most of the month over a possible exit of the U.K. from the European Union. Ultimately, the surprise result of the referendum resulted in a sluggish month for key indexes.
Moreover, Fed’s reluctance to hike rates also raised doubts about the strength of the domestic economy. May’s discouraging jobs report, a low level of business investment and lower than expected inflation did little to help the Fed take a rate hike call.
Other economic data was mostly encouraging in nature. Further, global crude production disruptions, slump in U.S. crude output and decline in the U.S. commercial crude oil inventories had a positive impact on oil prices.
Brexit Dominates Market Proceedings
By the end of the second week of the month, concerns regarding “Brexit” raised global growth worries which in turn dampened investor sentiment. Such concerns dragged down government bond yields significantly which had a negative impact on financial stocks. Polls released at that point indicated that voters may cast their votes in favor for Britain’s exit from the EU.
Investors were increasingly edgy over the referendum during the third week. Possibility of a Brexit intensified after fresh polls, which raised concerns about bouts of volatility and U.K. sinking into recession. However, Member of Parliament Jo Cox’s death led both the “leave” and “remain” camps suspend their campaigns temporarily.
During the fourth week, most of poll results were tilted towards a “Bremain” verdict. However, the United Kingdom ultimately voted in favor of leaving the European Union. The surprising referendum results pulled the global financial sector downward, which in turn negatively impacted the domestic financial domain.
However, benchmarks bounced backed after two trading days of losses. Investors grew optimistic and sought out assets mostly from beaten down sectors. Meanwhile, the dollar fell against the pound.
Disruptions Fuel Oil Price Rebound
During the first week, decline in oil prices had a negative impact on key U.S. indexes. Oil prices fell after UAE Oil Minister Suhail bin Mohammed al-Mazroui’s comments reduced possibilities of production freeze and OPEC members failed to come to any agreement regarding crude production freeze in a meeting last week.
Over the second week, disruptions in crude production in Nigeria, slump in the U.S. crude output and decline in the U.S. commercial crude oil inventories had a positive impact on oil prices. Also, weakening of the U.S. dollar following uncertainty over rate hike boosted oil prices.
Recent strikes of oil workers in Norway have also negatively impacted crude output. Also, refiners and oil producers in Venezuela struggled to maintain production following equipment shortages and power interruptions. Ultimately, global crude production disruptions, slump in U.S. crude output and decline in the U.S. commercial crude oil inventories had a positive impact on oil prices.
Q1 GDP Revised Upward
The “third” estimate from the Bureau of Economic Analysis showed that first quarter output of goods and services increased at an annual rate of 1.1%, higher than the consensus estimate of a 1% increase. Further, first-quarter GDP data was revised upward from the previously estimated 0.8% rise.
However, first quarter GDP growth was much lower than the rate of 1.4% recorded in the fourth quarter of 2015. Business spending declined for the second consecutive quarter. Also, consumer expenditure growth was revised downward from 1.9% to 1.5%. This was primarily due to low spending levels on services, primarily recreation and transportation.
Ultimately, there were two major reasons for the upward revision in the estimate for first quarter GDP. Firstly, exports increased by 0.3%, contrary to the earlier estimate of a decline of 2%. Most importantly, business expenditure on software, research and development increased by 4.4% versus the earlier estimate of a 0.1% decline. (read: 5 Stocks to Buy on Stronger GDP Data)
Positive Domestic Data
Data released through the month was mostly encouraging in nature. Encouraging data on private sector jobs, manufacturing and consumer spending increased chances of a rate hike. These reports raised speculations that economic growth had strengthened and had a positive impact on investor sentiment.
An increase in consumer credit boosted investor confidence. Retail sales increased 0.5% in and 2.5% year-on-year. Industrial production and capacity utilization declined while PPI increased. Durable orders decreased 2.2% in May to $230.7 billion, compared to a rise of 3.3% in April. It was also wider than the consensus estimate of 0.4% fall.
Housing Sector Still Upbeat
The only negative piece of housing data for the month was the decline in new home sales. Sales of new single-family homes declined 6% to a seasonally adjusted annual rate of 5,51,000 units in May from a downwardly revised April rate of 5,86,000. The number, however, represents an 8.7% increase year over year.
Other housing indicators were largely positive. The National Association of Home Builders (NAHB) reported that the home builder sentiment index (HMI) rose 2 points to 60 in June, after holding steady for the past four months.
Moreover, existing home sales rose 1.8% in May – its highest pace in almost a decade, per data released by the National Association of Realtors on Jun 20. Construction spending touched a five-year high in April, per data released earlier this month. However, U.S. housing starts fell 0.3% from a revised April number to an annual rate of 1,164,000 in May due to a decline in multi-family production. (read: Housing Indomitable Despite Slow Home Sales: 4 Picks)
Job Additions Slump, Unemployment Rate Falls
According to the Bureau of Labor Statistics (BLS), the U.S. economy created a total of only 38,000 jobs in May, significantly lower than the consensus estimate of 203,000. Nonfarm payrolls registered its lowest increase since Sep 2010. The tally was also considerably lower than March’s downwardly revised job number of 166,000. The Labor Department also revised jobs additions downward in April by 37,000.
Meanwhile, the unemployment rate was 4.7% in May, reaching its lowest level since Nov 2007 and was lower than the consensus estimate of 4.9% and April’s rate of 5%. Labor force participation rate fell 62.6%, as 458,000 individuals quit jobs or gave up jobs searches, which is the primary reason behind the decline in unemployment rate.
Further, the average hourly earnings gained 0.2% or 5 cents in May from previous month’s figure to $25.59 per hour, in line with the consensus estimate. But, it was lower than April’s 0.4% increase while year-ago gains remained unchanged at 2.5%.
FOMC Policy Statement
The Federal Open Market Committee (FOMC) decided to keep federal funds rate unchanged between 0.25% and 0.5% following concerns regarding weak jobs data. The FOMC stated: “The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished.” Also, Fed chairwoman Janet Yellen said “Brexit” is likely to have "consequences for economic and financial conditions in global financial markets."
Meanwhile, the Fed’s decision to stick with its 2016 rate path also appears to be on shaky ground with just six of the 17 policymakers forecasting one rate hike this year, compared to only one Fed official take a similar view in March. Yellen said: "I'm not comfortable to say it's in the next meeting or two, but it could be… It's not impossible that by July, for example, we would see data that led us to believe that we are in a perfectly fine course."
Moreover, the central bank expects the key inflation rate to remain “low in the near term." Also, the fed funds rate is now expected to be 3% in the long run, compared to earlier projection of 3.3%. Moreover, the Fed forecasted the economy would grow at 2% this year, declining from March’s anticipation of 2.2% rise. The expected GDP growth rate for next year was also revised down from 2.1% to 2%.
5 Star Performers for June
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 15%
- 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:
Cliffs Natural Resources Inc. (CLF - Free Report) is the largest producer of iron ore pellets in North America.
Price gain over the last 4 weeks = 29.8%
Cliffs Natural Resources has a Zacks Rank #1 (Strong Buy) and its expected earnings growth for the current year is more than 100%. The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.82x.
Virco Mfg. Corp. (VIRC - Free Report) designs, produces, and distributes quality furniture for the contract and education markets worldwide.
Price gain over the last 4 weeks = 22.5%
Expected earnings growth for current year = 30%
Virco Mfg. Corp holds a Zacks Rank #2 (Buy) and it has a P/E (F1) of 11.15x.
Vale S.A. (VALE - Free Report) is one of the world's largest producers and exporters of iron ore and pellets.
Price gain over the last 4 weeks = 21.9%
Apart from a Zacks Rank #1, Vale has a P/E (F1) of 15.73x. The stock’s expected earnings growth for the current year is more than 100%.
CRH Medical Corp. (CRHM - Free Report) offers healthcare services and products.
Price gain over the last 4 weeks = 18.1%
Expected earnings growth for current year = 81.8%
CRH Medical holds a Zacks Rank #2 and it has a P/E (F1) of 19.55x.
Neff Corp. is a regional equipment rental company in the U.S.
Price gain over the last 4 weeks = 17.2%
Expected earnings growth for current year = 22.9%
Neff Corp holds a Zacks Rank #2 and it has a P/E (F1) of 6.95x.
Will Markets Rebound in July?
Markets have quickly rebounded from the impact of the Brexit and investors have sought out oversold stocks. Meanwhile, the specter of falling oil prices seems to have diminished over the month. The major worry for investors at present is the economy.
The Fed Chair has already expressed her concern over the state of the labor market. Meanwhile, GDP estimates have been revised upward, but have still come in lower than expected. If domestic economic data improves over July, investors can look forward to better times.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>