Markets traversed a month characterized by turbulence but ultimately closed in the green. Geopolitical tensions stemming from the actions of North Korea dragged down stocks on several occasions. Domestic political events also added to investor concerns. Near the end of the month, Hurricane Harvey led to widespread devastation across Texas and crippled the United States’ refining capacity to a significant extent. In contrast, economic data on GDP and employment was encouraging, widely exceeding most expectations.
For the month, the Nasdaq, the S&P 500 and the Dow increased 1.3%, 0.1% and 0.3%, respectively. The blue-chip index briefly touched the psychological 22,000 milestone during the month. This was possible due to strong earnings from companies like Goldman Sachs (GS - Free Report) , JP Morgan (JPM - Free Report) , 3M (MMM - Free Report) , Boeing (BA - Free Report) and Apple (AAPL - Free Report) .
Meanwhile, geopolitical tensions between North Korea and U.S. heightened when the former threatened to attack the Guam naval and air base. President Trump responded to such statements by stating that any attacks by North Korea would be met with "fire and fury".
Political instability also reduced market gains. Trump disbanded two advisory panels following a backlash from top CEOs in the country following his comments on the Charlottesville incident. The much-awaited Jackson Hole Symposium also failed to throw light on the future of monetary policies in the U.S. During the end of the month, the fallout of Hurricane Harvey disrupted the oil industry in Houston.
Mixed Domestic Data
Economic data released during August was largely mixed in nature. In July, the ISM Manufacturing Index and the ISM Services Index declined to 56.3 and 53.9, respectively. Industrial production moved up 0.2% in July, lower than June’s pace of 0.4%. Leading indicators increased by 0.3%. Notably, durable orders declined by 6.8%. PPI and core PPI each slipped by 0.1%.
However, factory orders increased by 3% in June after contracting in May. Also, retail sales moved up 0.6%, the best performance since a gain of 0.9% last December. Both CPI and core CPI increased by 0.1%.
Second Estimate for Q2 GDP Rises Appreciably
The second estimate for the gross domestic product in the second quarter showed that the U.S. economy expanded by 3% during this period, whereas the consensus estimated it would grow by around 2.7%, notching its fastest rate of growth in more than two years. This was the result of increased consumer spending and business investment for the quarter.
Increase in consumer spending was pivotal in driving GDP to a 3% pace. Consumer expenditure was up 3.3% in the second quarter on account of increased expenditure on goods and services which also include car purchases. This is the best increase reported in a year. Moreover, business investment rose 0.6% in the second quarter. Also, corporate adjusted pretax profits increased 6.7% over a year.
Housing Sector Stumbles on Steep Prices
The housing sector seems to be experiencing some troubles at this point. These issues primarily stem from affordability and supply constraints. Housing Starts for the month of July fell 5.6% while building permits also experienced a decline of 3.2%. Pending home sales declined by 0.8% in July, the fourth such fall in five months. New home sales declined by 9.4% to a seven-month low.
Additionally, existing home sales declined by 1.3% in July. Despite this clutch of disappointing reports, the NAHB/Wells Fargo Housing Market Index increased from 64 in July to 68 in August. Also, in June, the S&P/Case Shiller 20 city index increased to 5.7%, lifted by strong housing demand.
Job Additions Rise, Unemployment Slumps to 16-Year Low
According to the U.S. Bureau of Labor Statistics the U.S. economy added 209,000 jobs in June, much higher than the consensus estimate of 181,000. In the past two months alone, a total of 450,000 new jobs have been added to the economy. This has led to unemployment declining from 4.4% in July to 4.3% in August.
The bulk of the new jobs were primarily from professional firms, health-care providers and restaurants and bars. However, despite the decline in unemployment, wages increased only 0.3% in July to an average of $26.36 an hour. Over a 12-month period till July, wages have increased 2.5%.
Dow Hits 22,000
On Aug 2, the Dow achieved the historical milestone of 22,000 for the first time. This historic benchmark was achieved within 107 trading days of Dow hitting 21,000.This stellar showing was made possible by Apple's upbeat earnings.
Apple reported spectacular results for third-quarter fiscal 2017, driven by the impressive Service segment performance. iPhone sales were also steady in the quarter. Earnings of $1.67 per share and revenues of $45.4 billion surpassed the Zacks Consensus Estimate of $1.57 and $44.7 billion, respectively. (Read More: AAPL - Free Report) %20Q3%20Earnings%20&%20Revenues%20Beat%20Estimates,%20Stock%20Up">Apple Q3 Earnings & Revenues Beat Estimates, Stock Up)
By Aug 7, the Dow had finished in the green for ten straight trading days, the highest since February. The blue-chip index had increased by 2.8% since February at this point. This has been possible due to a strong earnings season, specifically from Goldman Sachs and Boeing, which contributed the most toward the blue-chip index’s stellar showing.
North Korea Tensions Trigger Geopolitical Concerns
Ultimately, the Dow ended its 35-session record run of wins for the year on Aug 8, tumbling after President Trump sounded off a fresh warning to North Korea. President Trump announced that North Korea would be dealt with “fire and fury like the world has never seen”, if the country continues to threaten the US.
Markets recovered on Aug 14 as the geopolitical tensions between Pyongyang and Washington attenuated. U.S. Secretary of State Rex Tillerson and Secretary of Defense James Mattis, together stated that the Trump Administration would like to use diplomacy to resolve issues with North Korea.
Fresh concerns were generated on Aug 21 following the commencement of joint military exercises between the U.S. and South Korea. In the latest act of provocation, North Korea fired a ballistic missile over Japan’s Hokkaido on Aug 29. Expressing his outrage over the incident, Japan’s Prime Minister Shinzo Abe also said President Trump had assured him of the United States’ ‘strong commitment’ toward Japan’s security.
This incident was followed by mass stock selloff in the U.S. in an effort to move toward safer havens. However, Trump’s comments that "all options are on the table" reassured investors and losses incurred earlier were recouped.
Domestic Political Events Drag Down Stocks
Events in Washington led to losses or curbed gains on multiple occasions in August. On Aug 17, the Dow closed at its lowest level since May 17 following speculations regarding Gary Cohn’s resignation from the position of chief economic advisor to President Trump.
The rumor gained strength after the President disbanded two advisory panels, the Manufacturing Council and Strategic and Policy Forum. This decision came after CEOs resigned from these panels following Trump’s response to the Charlottesville incident.
On Aug 18, White House Chief Strategist Steve Bannon left the Trump administration. The departure of Bannon exposed the extent to which disagreement has gripped the Trump-era Republican Party.
However, further worries for investors were generated by Trump when he threatened to down the government in case Congress fails to approve funding for a physical wall between the United States and Mexico. Further, he commented that NAFTA would likely be terminated at some point.
Investors Focus on Jackson Hole for Rate Hike Clues
Near the end of the month, markets experienced low trading volumes. One of the reasons for such a lull was the reluctance of traders to make large bets ahead of the annual Jackson Hole Economic Policy Symposium to start on Aug 24.
The Fed Chair’s speech was closely observed by financial markets as investors were expecting her to throw some light on possible rate hikes and other monetary policy moves. Instead, she chose to focus on the history of the global crisis and the way policymakers have responded to subsequent challenges.
Hurricane Harvey Strikes Texas
Energy shares were impacted after tropical Hurricane Harvey, hit the coast of Texas on August 26 and 27, rendering oil refineries in the area dysfunctional. The shutting down of major oil refineries in and around Houston impacted almost 15% of the nation’s total refining capacity.
Economists suggested that it would be weeks before the refineries in Houston became functional once again and this led to decline in demand for oil by the refineries. Shares of refineries operating out the affected region showed an increase on Monday, only to pare some of the gains on Tuesday.
Minutes of the Federal Open Market Committee (FOMC) meeting held on Jul 25 and 26 indicate that sluggish inflation continues to worry a section of the central bank. The Fed’s favored gauge of inflation, core PCE inflation, came in at 1.5% for the month of June, well below the targeted level of 2%. Consequently, Fed officials remain divided about the path of interest rate hikes.
However, the Central Bank is eager on unwinding its $4.5 trillion balance sheet. The minutes also revealed that more than half the Fed officials wanted to wait till the next monetary meeting to release details about the planned unwinding of the humungous bond portfolio that the central bank has built up. This led most investors to assume that the procedure might start in September, at the time around which the next FOMC meeting is scheduled.
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 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:
ZAGG Inc (ZAGG - Free Report) designs, manufactures and distributes protective clear coverings and accessories for consumer electronic and hand-held devices, worldwide
Price gain over the last 4 weeks = 40.7%
ZAGG has a P/E (F1) of 14.60x and its expected earnings growth for the current year is more than 100%. The stock holds a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
KEMET Corporation (KEM - Free Report) , along with its subsidiary companies, is the world's largest manufacturer of solid tantalum capacitors and one of the world's largest manufacturers of multilayer ceramic capacitors.
Price gain over the last 4 weeks = 38.1%
KEMET Corp holds a Zacks Rank #2 (Buy) and its expected earnings growth for the current year is more than 100%. The stock has a P/E (F1) of 19.07x.
PDL BioPharma, Inc. (PDLI - Free Report) is a biopharmaceutical company focused on the research, development and commercialization of novel therapies for inflammation and autoimmune diseases, acute cardiac conditions and cancer.
Price gain over the last 4 weeks = 36%
PDL BioPharma holds a Zacks Rank #2 and its expected earnings growth for the current year is more than 100%. The stock has a P/E (F1) of 4.41x.
Summer Infant, Inc. (SUMR - Free Report) is a designer, marketer and distributor of branded durable juvenile health, safety and wellness products, which are sold principally to large U.S. retailers.
Price gain over the last 4 weeks = 25.7%
Summer Infant holds a Zacks Rank #1 and its expected earnings growth for the current year is more than 100%. The stock has a P/E (F1) of 14.33x.
Johnson Outdoors Inc. (JOUT - Free Report) is a designer manufacturer and marketer of outdoor equipment, marine electronics, watercraft and diving products.
Price gain over the last 4 weeks = 24%
Johnson Outdoors has a Zacks Rank #1 and its expected earnings growth for the current year is 100%. The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 18.24x.
Will Gains Continue in September?
Stocks have largely ended with inconsiderable gains at the end of a tumultuous month. Investors continue to bank on strong earnings and robust economic fundamentals in the absence of any immediate stimulus for market gains. It remains to be seen whether this trend continues in the near future. There are indications that volatility is on the rise and investors would do well to shore up their gains given that multiple concerns have recently gained strength.
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