The Chinese Year of the Dog kicked off on Feb 16, which has historically been promising for the U.S. stock market. Astute investors, thus, should turn bullish and use this encouraging calendar year to their advantage. And why not? The Republican tax overhaul is expected to have a positive effect on earnings this year. Fears of surging inflation and higher interest rates, on the other hand, are unwarranted and likely to ease.
Year of the Dog is Great for the U.S. Stock Market
The U.S. equity market traditionally performs well in the Year of the Dog, per LPL Research. Data from as early as 1950 showed that the 12-month return on the broader S&P 500 in the year was up more than 15% on average.
In four of the last five Year of the Dog, the market clocked double-digit gains. In 1958, returns were the highest, up 32.9%. In the most recent one ending in 2006, the returns were also quite solid, increasing 12.4%.
|Year||S&P 500 Return in the Year of the Dog|
Ryan Detrick, Senior Market Strategist at LPL added that “in fact, out of the 12 zodiac signs, no year sports a better average return.” In the past Year of the Goat, Tiger, Ox, Rabbit, Pig, Monkey, Dragon, Horse, Rat, Rooster and Snake, the S&P 500 had given an average return of 14.9%, 13.8%, 13.5%, 10.6%, 10.5%, 9.2%, 8.7%, 6.3%, 3.2%, 1.8% and 0.8%, respectively.
Though a few may be skeptical about investing based on stars, but this Year of the Dog has certainly started off on a bullish note. The S&P 500 managed to log its sixth straight rise on Feb 16. After all, U.S. earnings expectations have sharply accelerated on tax stimulus, while inflation scares are overblown.
Tax Plan to Boost Earnings
The Trump administration’s tax cut policy is expected to boost earnings, in a market that already has historically high valuations. The headline-grabbing move was that the corporate tax rate is lowered from 35% to 21%. Republicans also repealed the 20% corporate alternative minimum tax, while any income brought back from overseas will be taxed 8% to 15.5%, instead of the current 35% (read more: GOP Passes Landmark Tax Bill: Best & Worst for Stocks).
Earnings growth this year is set to be healthy. Most of the S&P 500 companies have provided guidance that exceeded expectations, while the Q4 earnings season is already on track to be quite impressive. For the 398 S&P 500 members that have reported results, earnings are up 14.5% from the same period last year on 9% higher revenues, with 77.9% beating EPS estimates and 75.6% surpassing revenue estimates.
In fact, Q4 earnings among all sectors are expected to be up 14% from the same period last year on 8.2% higher revenues. This will follow the 6.7% earnings growth recorded in the third quarter of 2017 on 5.8% higher revenues (read more: What Will Retail Earnings Show?).
Inflation and Rate Hike Fears Overblown
A surge in inflation in January possibly leading to faster-than-expected rate hikes did trigger a sudden panic among investors. Higher inflation would prompt the Federal Reserve to hike short-term interest rates at a faster pace than expected. This, in turn, will increase borrowing costs for businesses and consumers, which could eventually lead to a slowdown in the economy.
But, market pundits believe that the spike in inflation last month will fizz out. Even though the consumer price index (CPI) inched up 0.5% in January from the previous month, it stayed at 2.1% in January on a year-over-year basis. Thus, it has fallen from the nearly 3% annual growth rate in the last three months. Meanwhile, the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index, has been below the central bank’s 2% target since mid-2012.
Wage growth in January also doesn’t hint at a surge in cost of living. After all, wages rose on colder-than-normal weather condition, which is a seasonal factor. Further, if managers and supervisors’ salaries are excluded, hourly wages increased at a sluggish pace. This showed that much of the increase was not evenly distributed and concentrated mostly on managers (read more: Wages See Fastest Growth Since 2009: Top 5 Gainers).
5 Biggest Gainers
Given the bullishness, investing in stocks that can make the most of the Year of the Dog seems judicious. We have, thus, selected five such stocks that are poised to yield stellar returns this calendar year that constitute bulk of the Year of the Dog.
These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and 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.
W.W. Grainger, Inc. (GWW - Free Report) distributes maintenance, repair, and operating (MRO) supplies; and other related products and services that are used by businesses and institutions in the United States and internationally. The stock has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 24.9% over the last 60 days. The company is expected to return 20.5% this year versus the industry’s estimated return of 12.6%.
Lennar Corporation (LEN - Free Report) operates as a homebuilder primarily under the Lennar brand in the United States. The stock has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 10.2% over the last 60 days. The company is expected to return 38.9% this year, in comparison with the industry’s projected return of 24.2%.
Ulta Beauty, Inc. (ULTA - Free Report) operates as a beauty retailer in the United States. The stock has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 0.1% over the last 60 days. The company is expected to return 28.1% this year versus the industry’s estimated return of 11.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Seagate Technology plc (STX - Free Report) provides data storage technology and solutions in the United States and internationally. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 21.2% over the last 60 days. The stock is expected to return almost 18% this year, in comparison with the industry’s estimated return of 13.9%.
International Paper Company (IP - Free Report) operates as a paper and packaging company. The stock has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 10.1% over the last 60 days. The company is expected to return 37.5% this year versus the industry’s projected return of 17%.
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