September is usually one of the toughest months for stocks. The NAFTA deal hanging in the balance and another escalation in the trade war between the United States and China aren’t helping investors’ sentiments either. One of the best performers so far this year, the tech sector, has also taken a beating after U.S. lawmakers grilled prominent Silicon Valley executives over foreign efforts to tilt U.S. politics.
But, the month of August bucked the trend and ended in the green banking on upbeat consumer confidence and solid corporate results. Historically, September tends to finish in the positive territory, whenever August does the same. In fact, history indicates that strong manufacturing activity and midterm elections will help the broader market continue its winning run this year, prompting many astute analysts to raise their target prices. Thus, investing in sound stocks that can make the most of this encouraging long-term view seems judicious.
Wall Street Starts September on a Somber Note
September is off to a poor start, with the technology sector seeing its worst one-day drop since late July in the last trading session. The weakness in tech stocks was largely due to Facebook, Inc. (FB) and Twitter, Inc.’s (TWTR) executives being testified on Capitol Hill about online misinformation (read more: Twitter and Facebook Appear on Capitol Hill and Their Shares Slide).
Geopolitical concerns, especially, trade related issues also took a toll on the market. The United States and Canada are leaving no stone unturned to resolve differences as they work toward re-forming NAFTA. But, during the weekend, President Trump did threaten to leave Canada out of the new NAFTA. He said that there was “no political necessity” to have Canada in the new NAFTA deal.
If this wasn’t enough, Trump could impose tariffs on almost half of all Chinese goods entering the country by this week. China, in turn, said that they will be forced to roll out retaliatory measures, if the United States applies new tariff measures.
Trade-related issues are never good for the economy as they squeeze corporate profit margins. Thus, escalating trade tensions are, no doubt, killing investors’ risk appetite.
September Won’t be That Bad This Year
Stock investors, however, shouldn’t fear this weak start to September. This is because the S&P 500 averages a gain of 0.2% in September, when the broader benchmark is positive through August, per Bespoke’s data. And then the index rises an additional 3.38% from September through the rest of the year. Lest we forget, this year, the S&P 500 had notched its best gain in August since 2014, so expect the market to eventually finish in the green this month.
The two pillars of the U.S. economy — consumers and corporates — are still solid. This should certainly help the broader market scale north. According to the Conference Board, the consumer confidence index climbed to 133.4 in August from a revised 127.9 in July, the highest since October 2000 and above the post-recession high of 130 scaled this February. Consumers’ optimism was largely driven by strength in the current labor market (read more: US Consumers Most Confident Since 1990s Internet Boom: 5 Picks).
And when it comes to Q2 earnings, 467 S&P 500 companies that have reported so far have seen an earnings increase of 25.5% from the same period last year on 9.9% higher revenues, with 79.2% of the companies beating EPS estimates and 72.8% surpassing revenue estimates (read more: Strong Retail Sector Earnings Performance).
Stocks Have More Room to Rally as ISM Peaks
The Institute of Supply Management (ISM), by the way, reported that its manufacturing index climbed to a 14-year high of 61.3% in August from 58.1% in July. This exceeded analysts’ expectations of 57.9%. A reading of more than 50% indicates an expansion in activity (read more: ISM Manufacturing Index Hits 14-Year High: 5 Picks).
Tony Dwyer, equity strategist at Canaccord Genuity, noted that the ISM typically peaks well before recession and the S&P 500 usually surges nearly 35.4% in the subsequent two years after the ISM peaks. That’s why, he raised the S&P 500’s target to 3,200 for the end of 2018, citing strong manufacturing data, a rise of almost 11% from its current level.
Brace for the Market’s Best 9-Month Stretch
Oppenheimer & Co. technical analyst Ari Wald, in fact, added that a long-term view actually looks rosier. He said that “Q4 of midterm years through Q2 of pre-election years have been the best nine-month stretch of the four-year U.S. presidential cycle since 1929.”
During midterm election years, which is this year, fourth quarters deliver a 6.7% jump on average for the S&P 500, while the index registers gains of 5.2% and 4.5% for the next year’s first and second quarters, respectively.
Others have also shared a similar view. A UBS team noted that the S&P 500 has moved north by 14.5% on average from the end of August to the end of March during midterm elections.
Top 5 Winners
Since a long-term buying opportunity maybe playing out in the equity market, investing in solid stocks will be prudent. These stocks not only possess a Zacks Rank #1 (Strong Buy) but also are poised to gain significantly in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.
Such stocks also flaunt 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.
Caterpillar Inc. (CAT - Free Report) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for construction, resource, and energy and transportation industries. The company has a VGM Score of A. In the last 60 days, 10 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings increased 7.4% in the same period. The company’s projected earnings growth rate for the current year is 67.7%, while the Manufacturing - Construction and Mining industry is projected to rise 2%.
D.R. Horton, Inc. (DHI - Free Report) operates as a homebuilding company in East, Midwest, Southeast, South Central, Southwest, and West America. The company has a VGM Score of A. In the last 60 days, 17 earnings estimates moved north, while two moved south for the current year. The Zacks Consensus Estimate for earnings increased 3.8% in the same period. The company’s projected earnings growth rate for the current year is 41.2%, while the Building Products - Home Builders industry is likely to rise 36.7%.
Bristol-Myers Squibb Company (BMY - Free Report) discovers, develops, licenses, manufactures, markets, and distributes biopharmaceutical products. The company has a VGM Score of B. In the last 60 days, eight earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 5.5% in the same period. The company’s projected earnings growth rate for the current year is 20.3%, while the Large Cap Pharmaceuticals industry is expected to rise 8.7%.
athenahealth, Inc. (ATHN - Free Report) provides network-based medical record, revenue cycle, patient engagement, care coordination, and population health services for medical groups and health systems. The company has a VGM Score of B. In the last 60 days, 18 earnings estimates moved north, while three moved south for the current year. The Zacks Consensus Estimate for earnings rose 3.5% in the same period. The company’s projected earnings growth rate for the current year is 68.2%, while the Medical Info Systems industry is expected to rise 0.2%.
BJ's Restaurants, Inc. (BJRI - Free Report) owns and operates casual dining restaurants in the United States. The company has a VGM Score of B. In the last 60 days, nine earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings increased 5.5% in the same period. The company’s projected earnings growth rate for the current year is 49.7%, while the Retail - Restaurants industry is expected to rise 8.4%.
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