August is widely believed to be a bearish month for the stock market. However, market participants shouldn’t fear a stock market correction, simply because July has been pretty strong and 2017 has turned out to be an encouraging year so far. Upbeat corporate earnings and the economy’s breezing past the $19 trillion mark for the first time ever will surely help the broader markets fend off any negative sentiments in August.
In fact, historically, August has traditionally been a bullish month for the Nasdaq. This calls for investing in some rock-solid stocks listed in the tech-heavy index for solid gains.
August Traditionally a Soft Month for the Dow Jones
As the Dow Jones entered August, it braced itself for a two-month stretch known for stock market declines. August has been the worst month for the blue-chip index for the past two decades, with an average decline of 1.4%.
The Dow has also endured major turbulences in August since the bull market began after the 2008-09 financial crisis. In 2015, the Dow tanked 6.6% in August on fears of a slowdown in the world’s second-largest economy, China. Such apprehensions emerged after Beijing devalued its currency. Similarly in 2013, the Dow tumbled 4.4% in August due to Syria’s use of chemical weapons and weak earnings releases by Macy’s and Walmart. Fear of Greece defaulting on its debt affected the Dow in Aug 2011.
S&P 500 Faces Perilous Summer
The S&P 500 is also preparing itself as it enters the historically soft month of August. The index, on an average, has gained a meagre 0.08% over the past 50 years in the month, as per data from Schaeffer’s Senior Quantitative Analyst Rocky White. Performance-wise, September is second to August in terms of the worst performing months.
The S&P 500 usually puts up a weak performance in August as the month follows the presidential elections. Sometimes in August, the benchmark index had posted negative returns while almost all other months registered positive results.
What’s Working Against the Markets?
August is vacation time and investors often view the indices critically before making investment plans for the rest of the year. So, the slightest of negative tidings spook investors, resulting in increased market gyrations.
August has also been a weak month for a very specific reason. In the month, farmers usually withdraw substantial funds from Wall Street to purchase seeds. This outflow of funds results in an underperformance by the stock market. And why? Such high outflows negatively impact the psyche of Wall Street investors and traders.
July Sets the Tone for an Upbeat Year
But, the stock market’s strong July performance might dispel some of the negative sentiments that emerge in August. All major indices saw their best performance in July since February, banking on healthy corporate earnings results and growing optimism on the strength of the economy. Such a positive momentum is expected to continue in August as well.
Total Q2 earnings for the companies listed in the S&P 500 index are expected to be up 9.2% from the same period last year on 5% higher revenues. Secondly, an above-average proportion of companies are already beating EPS and revenue estimates (read more: Q2 Earnings Season Past the Halfway Mark).
The U.S. economy, on the other hand, rebounded in the second quarter and more than doubled from the first quarter. Pick-up in consumer spending and an uptick in business investment in software, research and equipment boosted economic growth. Consumer outlays in particular improved on a steady job market and healthier household finances (read more: US GDP Crosses $19TN for the First Time: 5 Best Gainers).
Analytics firm Kensho, in the meanwhile, added that if the S&P 500 gains 9% or more on a year-to-date basis through July, performance in August performance is usually higher in 8 of 14 occurrences since 1980. Heading into August, the benchmark index has gained more than 10%.
5 Top Stocks to Buy in August
Even though stocks have entered their worst month of the year, July’s stellar show is expected to ward off any serious downturns. The Nasdaq, in fact, has done well in August in the large majority of years from 1990 to date. The Nasdaq has overcome the dot-com crash and has yielded gains as much as 4.7% or more on an average in August. Banking on such positives, investing in fundamentally sound firms listed in the tech-laden index seems to be judicious.
We have, thus, selected five such stocks that that not only boast a Zacks Rank #1 (Strong Buy) or 2 (Buy) but also have a VGM score of ‘A’ or ‘B.’ Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Cypress Semiconductor Corporation (CY - Free Report) manufactures embedded system solutions for automotive, industrial, home automation and appliances, consumer electronics and medical products. The company has a Zacks Rank #2 (Buy) and a VGM Score of 'A.' The company has returned 24.2% on a year-to-date basis, higher than the industry’s gain of 14%. The company is projected to gain 168.6% this year, in contrast to the industry’s projected decline of 4%.
Ultra Clean Holdings Inc (UCTT - Free Report) is engaged in the design, engineering and manufacture of production tools, modules and subsystems the semiconductor capital equipment industry. The company has a Zacks Rank #1 (Strong Buy) and a VGM Score of 'A.' The company has returned 141.8% on a year-to-date basis, higher than the industry’s gain of 31.8%. The company is likely to gain 163.8% this year, higher than the industry’s projected growth of 9.3%.
Facebook Inc (FB - Free Report) is focused on building products that enable people to connect and share through mobile devices, personal computers and other surfaces. The company has a Zacks Rank #2 and a VGM Score of 'B.' The company has returned 47.1% on a year-to-date basis, higher than the industry’s gain of 20.1%. The company is projected to increase 45.1% this year, higher than the industry’s projected growth of 19.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cintas Corporation (CTAS - Free Report) is a provider of corporate identity uniforms through rental and sales programs, as well as a provider of related business services. The company has a Zacks Rank #2 and a VGM Score of 'B.' The company has returned 16.7% on a year-to-date basis, higher than the industry’s gain of 13%. The company is projected to gain 15.5% this year, higher than the industry’s projected growth of 9.8%.
SkyWest, Inc. (SKYW - Free Report) operates regional airline operations in the U.S. The company has a Zacks Rank #2 and a VGM Score of 'A.' The company has given positive returns on a year-to-date basis and is projected to increase 18.1% this year, in contrast to the industry’s estimated decline of 0.8%.
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