With erratic movements of major market indices last week, many analysts found it quite tricky to spot the prime factor behind the extreme volatility.
Although The Dow Jones Industrial Average rose 1.4% on Feb 9 after a wild week, fears of a downturn in the near future gripped the market.
However, chances of a recession are negligible given record low unemployment levels and better-than-expected job additions. Favorable fourth-quarter earnings also acted as an antidote.
Markets Bled Last Week
On average, the Dow moved more than 1,000 points every day through the week. The market saw the index alter directions roughly 53 times, per The Wall Street Journal. Moreover, the weekly decline of 5.2% for the index was the steepest in more than two years.
The encouraging wage growth data convinced investors of a probable spike in inflation, which might lead the central bank to raise interest rates sooner than expected. Per the Bureau of Labor Statistics, private sector workers witnessed 2.9% year-over-year wage growth in January, the highest since June 2009. The fear of impending inflation led the 10% drop in Dow from the record-high mark of Jan 26.
Chances of Recession Negligible
Most analysts believe that the market was overdue for a correction and major indices might even plunge further, but that will not lead to a recession anytime soon. The signs of recession are normally reflected in indicators like GDP and employment data, and these parameters show no signs of a recession.
GDP Data Solid: The nation’s GDP increased at a seasonally adjusted annual rate of 2.6% in the final three months of 2017, following gains in the previous two quarters of more than 3%, per the “advance” estimate released by the Bureau of Economic Analysis. In fact, this marked the economy’s strongest stretch of growth since the expansion started in mid-2009.
Notably, in the first quarter of this year, GDP might jump 5.4%, per the latest estimate of Atlanta Fed.
Significant Job Addition & Low Unemployment: Per the US Labor Department report, 200,000 new non-farm payroll jobs were created in January, beating market expectations. According to a survey by Reuters, most economists were expecting an addition of 180,000 U.S. jobs.
Also, the jobless rate remained at an ultra-low level of 4.1%, and workers’ hourly wages increased 2.9% year-over-year in January 2017.
Favorable Q4 Earnings Dispel Fears
We are almost at the tail end of the Q4 earnings season, with 341 S&P 500 members having reported their numbers and 159 yet to report. Per the latest Earnings Preview, total earnings for all S&P 500 companies will be up 14.1% from the same period last year on 8.2% higher revenues. The expected year-over-year earnings growth for the fourth quarter is way higher than the 6.7%, 11.2% and 13.5% growth rates for 3Q17, 2Q17 and 1Q17, respectively. Moreover, we expect the index’s earnings to increase to 15.7%, 17.5% and 18.1% in 1Q18, 2Q18 and 3Q18, respectively.
Which Stocks to Focus On?
Given the healthy expectations for earnings, most analysts believe that the market will not be unstable for long.
Picking stocks with strong fundamentals seems to be a smart option but the task can be a daunting one.
This is where our VGM Score comes in handy. Here, V stands for Value, G for Growth, and M for Momentum, and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a solid Zacks Rank and VGM Score. Moreover, we have chosen firms with market capitalization of more than 10 billion, as large cap stocks are comparatively stable and less volatile.
All the four stocks, with a VGM Score of A, sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in San Antonio, TX, Andeavor has a strong reefing presence. The refineries, where the company has operatorship interest, have a total daily capacity of 1.2 million barrels.
The company managed to surpass the Zacks Consensus Estimate in three of the last four quarters, the average positive surprise being 37.8%. Also, we expect the company to witness year-over-year earnings growth of 58% through 2018.
Headquartered in Menomonee Falls, WI, Kohl’s (KSS - Free Report) , with roughly 1,100 stores spreading across 49 states, is basically an omnichannel retailer.
The company beat the Zacks Consensus Estimate in three of the last four quarters, the average positive surprise being 37.8%. We expect year-over-year earnings growth of 8.5% and 14.5% for fiscal 2017 and fiscal 2018, respectively.
Headquartered in Findlay, OH, Marathon Petroleum (MPC - Free Report) is a leading refiner of crude. The company beat the Zacks Consensus Estimate for earnings in three of the last four quarters, with average positive surprise of 182.6%. Marathon Petroleum is anticipated to post earnings growth of 34.74% in 2018.
Headquartered in Stamford, CT, United Rentals, Inc. (URI - Free Report) is involved in businesses like renting varieties of equipment. The company posted an average positive earnings surprise of 3.7% for the last four quarters. We expect the firm to report earnings growth of 45.2% in 2018.
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