Markets enjoyed a month of strong gains on the back of a modest increase in earnings numbers and impressive economic data. Global markets remained largely unaffected by the fallout of the surprise Brexit vote. Meanwhile, the central banks of Japan and England held out hopes of stimulus. Japan’s Prime Minister Abe also announced surprise stimulus measures. The Fed kept rates unchanged but indicated that an increase could be in the cards by the end of the year.
For the month, the S&P 500, the Dow and the Nasdaq gained 3.6%, 2.8% and 6.6%, respectively. Markets rebounded from the steep losses it suffered on Brexit woes, with U.S. stocks climbing to record highs. Corporate results came in better than expected, while reassuring domestic economic data raised confidence in the strength of the economy. From homebuilding to retail sales to job creation, all economic reports showed signs of improvement.
Several major companies posted upbeat earnings results during the second quarter earnings season, with banks leading the pack. Stocks also surged on stimulus hopes from central banks around the world to counter economic gloom. The Bank of England said that most of its members are expecting a loosening of policy in August. This reassured investors who were expecting further stimulus measures to stem the rot of an already reeling economy.
Heavyweights Impressive in Q2, Banks Post Solid Results
Banks have been the leading lights of the Q2 earnings season. JPMorgan Chase & Co. (JPM - Free Report) beat on both earnings and revenues as did Goldman Sachs Group, Inc. (GS - Free Report) . Citigroup Inc. (C - Free Report) and Bank of America Corporation’s (BAC - Free Report) results beat estimates only on earnings. Wells Fargo (WFC - Free Report) just met the consensus estimate on the bottom line while missing slightly on sales (read: 4 Financial Mutual Funds to Buy On 4-Week Market Rally).
PNC Financier’s (PNC - Free Report) earnings were also impressive, while BlackRock BLK modestly underperformed expectations. Morgan Stanley (MS - Free Report) also beat both on earnings and revenue estimates. Tech heavyweights such as Apple (AAPL - Free Report) , Facebook FB, Alphabet GOOGL, Amazon (AMZN - Free Report) and Microsoft (MSFT - Free Report) all posted encouraging earnings numbers.
However, relatively small companies have continued to underperform, even though a modest improvement is on track. Total earnings for the 208 index members that had reported results up to July 27 were down 4.7% from the same period last year as revenues increased a nominal 0.4%. As for beat ratios, 73.1% surpassed EPS estimates and 51.9% came in ahead of top-line expectations (read: Q2 Earnings: Modest Improvement Continues).
Bank of England Stimulus Likely, Bank of Japan Acts
On Jul 15, Bank of England (BOE) surprised the markets by keeping their rate unchanged at 0.5%. However, Britain’s central banks hinted at introduction of fresh economic stimulus measures next month. In a statement, the BOE said that “in the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis” most of the Committee’s members “expect monetary policy to be loosened in August.”
Japan’s Prime Minister Abe’s announcement of a new stimulus package at the end of the month took most analysts and economists by surprise. Abe said that fiscal stimulus measures amounting to 13 trillion yen or $265 billion will be implemented to support Japan’s economy. Details of the measure are yet to be released. But the intention of these steps are clear, to combat a 15-year-long deflationary cycle.
Though most of the details of the package are yet to be released, one of the key measures has been announced. The government intends to raise the country’s minimum wage by 3% to encourage higher consumer expenditure. Further, there are indications of widening the spend on infrastructure. This includes increasing the size of ports and speeding up the pace of a high-speed train project (read: 4 Stocks to Buy on Japan's Fresh Economic Stimulus).
GDP Data Disappoints
Slower–than-expected pace of growth for the U.S. economy during the second quarter was unwelcome. According to the “advance” estimate by the Bureau of Economic Analysis, the second quarter output of goods and services increased at an annual rate of 1.2%, which was lower than the consensus estimate of 2.6% growth. In the first quarter, real GDP increased 0.8%.
GDP growth was disappointing despite a considerable increase in consumer spending. This metric increased at an annual rate of 4.2%, the highest rate of growth since the fourth quarter of 2014. However, business investment slumped by 9.7%, negating the impact of rising consumer spending. During the quarter, business inventories decreased by $8.1 billion, marking the first decline in this metric since the third quarter of 2011.
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. Retail sales increased 0.6% while industrial output expanded at the fastest monthly rate in 11 months.
Industrial output increased 0.6%, a turnaround from a 0.3% decline in May. Industrial output bounced back last month after a downturn over the past 18 months mostly due to weak overseas demand for many products and a stronger dollar (read: 4 Funds to Cheer on Best Industrial Output in 11 Months).
PPI rose 0.5% while CPI rose 0.2% in June. Leading indicators increased by 0.3 Consumer Confidence Index remained mostly unchanged at 97.3 in July compared to June’s reading of 97.4. However, durable orders decreased 4%, wider than a fall of 2.8% in May.
Housing Sector Shines
All of the major housing sector reports indicated that the sector is in particularly good shape. The only negative piece of housing data for the month was a marginal decline in the National Association of Home Builders (NAHB)/Wells Fargo builder sentiment index, which fell from 60 to 59 in May. In any case, the index remained flat at 58 for most of 2016 before increasing to 60 in April (read: 4 Stocks to Buy Despite Softer Homebuilder Sentiment).
Among other indicators, housing starts rose 4.8% in June while building permits too rose 1.5%.Sales of existing homes rose 1.1% in June from May to a seasonally adjusted rate of 5.57 million, its highest level since Feb 2007 (read: 4 Stocks to Ride 9-Year High U.S. Home Resales).
Sales of newly built single family homes jumped 3.5% in June to a seasonally adjusted annual rate of 592,000, the highest level since Feb 2008 (read: Buy 4 Home Furnishing Stocks on 8-Year High New Home Sales).
Pending Home Sales Index increased 0.2% from May to 111 in June, reaching its second best settlement in the last 12 months.
Strong Job Additions, Labor Participation Rise
According to the Bureau of Labor Statistics (BLS), the U.S. economy created a total of 287,000 jobs in June, significantly higher than the consensus estimate of 177,000. The economy added higher-than-expected new jobs for the first time in the last four months. The tally was also considerably higher than May’s downwardly revised job number of only 11,000.
Meanwhile, the unemployment rate was 4.9% in June, which was higher than the consensus estimate of 4.8% and May’s rate of 4.7%. This was mainly because more than 400,000 Americans re-joined the workforce and the labor force participation rate rose to 62.7%.
Further, average hourly earnings gained 0.1% or 2 cents in June from May to $25.61 per hour. However, it was lower than the consensus estimate of 0.2% and May’s 0.2% increase while year-ago gains advanced by 2.6%.
The minutes of June 14-15’s FOMC policy meeting indicated that most Fed policymakers decided to keep the rate unchanged. Per the minutes, "almost all participants judged that the surprisingly weak May employment report” raised uncertainty over the labor market outlook.
Moreover, the minutes highlighted that another reason for not hiking rates was policymakers’ decision to wait for the British referendum’s results. This was mainly because most of them anticipated that the outcome of the referendum “could generate financial market turbulence” that may weigh on “domestic economic performance.”
FOMC Policy Statement
After the end of its two-day policy meeting on Jul 27, the Fed decided to keep its rates at the previous range of 0.25% to 0.5%. In its policy statement, the FOMC said that labor market has “strengthened” and economic activity has been growing at a “moderate rate.”
The central bank also said that household spending has increased strongly and though inflation remained unchanged in recent times, it is expected to increase to 2% “over the medium term.”
The FOMC statement indicated that an encouraging economic scenario might result in a rate hike this year. With the fall in “near-term risks to the economic outlook,” rate hike as early as September might be possible.
5 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 top 5 stocks that made it through this screen:
AK Steel Holding Corporation AKS is a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products.
Price gain over the last 4 weeks = 40.1%
AK Steel Holding has a Zacks Rank #2 (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 18.39x.
Tempur Sealy International Inc. TPX is involved in the development, manufacturing and marketing of bedding products on a global basis.
Price gain over the last 4 weeks = 36.7%
Expected earnings growth for current year = 21.7%
Tempur Sealy holds a Zacks Rank #1 (Strong Buy) and it has a P/E (F1) of 19.49x.
Seagate Technology plc (STX - Free Report) is the second-largest manufacturer of hard disk drives (HDDs) in the U.S.
Price gain over the last 4 weeks = 31.5%
Expected earnings growth for current year = 20%
Apart from a Zacks Rank #2, Seagate has a P/E (F1) of 12.48x.
OMNOVA Solutions Inc. (OMN - Free Report) develops, manufactures and markets emulsion polymers, specialty chemicals and decorative and building products for a variety of industrial, commercial and consumer markets.
Price gain over the last 4 weeks = 30.6%
Expected earnings growth for current year = 57.4%
OMNOVA holds a Zacks Rank #1 and it has a P/E (F1) of 16.71x.
MaxLinear, Inc. MXL is a provider of radio-frequency analog and mixed signal semiconductor SoC solutions for broadband communication applications throughout the globe.
Price gain over the last 4 weeks = 21.3%
Expected earnings growth for current year = 53.7%
MaxLinear holds a Zacks Rank #2 and it has a P/E (F1) of 15.09x.
Can Markets Sustain Momentum In August?
A substantially better earnings season and impressive economic data have helped markets surge over last month. The fallout from the surprise Brexit verdict has also been largely muted while the world’s central banks seem to be in a mood to provide further stimulus measures. The only disappointment has come in at the end of the month, in the form of a surprisingly lower rate of GDP. If other economic indicators continue to remain encouraging and earnings improvement remains on track, markets could continue to gain in the days ahead.
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