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Wall Street Resilient to Trade Jitters: Top 5 Gainers

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Let’s admit that a trade war has become less of a concerning factor for most stock-market investors. They have chosen to look past US-China trade conflict as tariffs on both US and Chinese goods are not as bad as feared. 

Instead, investors are loading up on U.S. stocks, backed by solid economic data and promising corporate outlook, courtesy of the tax cut bill passed last year. This has pacified investors to a large extent, with gyrations in the broader market almost negligible.

Stocks Climb as Tariffs Seem Less of a Threat

President Trump recently built pressure on Beijing by announcing tariffs on about $200 billion of Chinese products in response to “unfair trade practices.” As per administrative officials, tariffs on Chinese imports will be effective Sep 24 and will primarily be set at a rate of 10%. This will rise to 25% by the end of the year. This time, the tariffs will raise prices of thousands of consumer products — starting from housewares and foods to luggage and electronics.

China, in the meanwhile, retaliated with tariffs of 5% to 10% on $60 billion worth of U.S. products which will go into effect on Sep 24. This indicates a move toward a full-fledged trade war that could derail economic growth and squeeze corporate profits (read more: Sino-US Trade Relations Turn Sour: Winners & Losers).

The U.S. stock market, however, closed higher on Sep 18 as investors chose to ignore the intensifying US-China trade tensions. They see the tariffs as less consequential than apprehended. After all, the United States did not stick to the initial 25% tariff imposition plan.

Karl Haeling of LBBW rightly said that “it’s a sign that Trump recognises the pressure, the more he raises tariffs before Christmas, and the more it could increase unpopularity.” Needless to say, American business communities have discouraged the decision to levy tariffs on millions of products American consumers buy on a daily basis.

China too has applied a 10% tariff on certain goods that it had earlier earmarked for a 20% levy. The Shanghai Composite bounced back from its lowest level in four years, and rose nearly 2% overnight. By the way, China’s plunge protection team is prepared to save the stock market in case trade tensions ratchet higher. Analysts Michael Tong and Luka Zhu said in a report on Sep 18 that “the team usually steps in to act as a market stabilizer when the stock market experiences a rapid and sharp correction, or during politically-sensitive periods.”

Investors Focus on Robust Economy

Investors, at the same time, chose to keep an eye on improving economic reports and strong growth in corporate earnings. Americans, in fact, haven’t been this confident about the economy in 18 years. As per the Conference Board, the consumer confidence index climbed to 133.4 in August from a revised 127.9 in July. The key economic indicator that measures attitudes on future economic prospects reached the highest level since October 2000 and surpassed the post-recession high of 130 scaled this February.

Consumer sentiment in September climbed to the second-highest level since 2004, according to a University of Michigan survey. The preliminary report showed that the consumer sentiment index came in at 100.8. Such an upbeat reading will help household spending increase leaps and bounds.

Consumers’ optimism was largely driven by strength in the labor market. The current unemployment rate is now at a nearly two-decade low, while the U.S. economy added jobs for 95 successive months in August, the longest stretch on record.

And when it comes to Q2 earnings, growth reached its highest level since 2010, eclipsing the pace set in 1Q18 of 24.5% earnings growth on 8.5% revenue gains. Meanwhile, earnings growth in Q3 is expected to be up 18.1% from the same period last year on 7.2% higher revenues. This will mark the 6th double-digit earnings growth in the last seven quarters (read more: Looking Ahead to Q3 Earnings Season).

In fact, investors are getting optimistic about U.S. stocks, largely because of the encouraging outlook for corporate profits. As per the latest monthly survey of fund managers by Bank of America Merrill Lynch, released on Sep 18, there is a net allocation of 21% overweight to the US equity market, the highest since January 2015.

 

The survey also figured out that a net 69% of those polled said that the United States is the most sorted region when it comes to earnings expectations.

 

Markets Keep Calm

The picture for corporate profits coupled with improving consumer sentiment resulted in a low-volatile market. The Cboe Volatility Index (VIX), a popular measure of volatility and investor anxiety, is currently at 12.79, well below its long-term average of 19 to 20. The VIX has, in fact, dropped more than 20% since the beginning of July.

Bespoke Investment Group added that the average absolute daily change, in either direction, for the S&P 500 has been 0.4% in the last 50 trading sessions. But, in September, the index has average daily moves of less than 0.24%. This extremely low volatility is extremely unusual, since September is traditionally one of the most volatile months.

5 Top Winners

Given the buoyancy, we have selected five solid stocks from the major indices. These stocks have not only gained on Sep 18 but are poised to move north in the near term.

At the same time, these stocks 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.

American Woodmark Corporation (AMWD - Free Report) manufactures and distributes kitchen, bath, and home organization products for the remodelling and new home construction markets. The company has a Zacks Rank #2, a VGM Score of A and has rallied 1% on Sep 18. The company’s projected growth rate for the current year is 45.4%, while the Furniture industry is expected to rise 9.2%.

In the last 60 days, two earnings estimates moved north, while none moved south for the next year. The Zacks Consensus Estimate for earnings rose 1.1% in the same period.

Guess', Inc. (GES - Free Report) designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children. The company has a Zacks Rank #1, a VGM Score of A and has rallied 1.7% on Sep 18. The company’s projected growth rate for the current year is 48.6%, while the Textile - Apparel industry is expected to rise 17.9%.

In the last 60 days, three earnings estimates moved north, while none moved south for the next year. The Zacks Consensus Estimate for earnings rose almost 3% in the same period.

Rocky Brands, Inc. (RCKY - Free Report) designs, manufactures, and markets footwear and apparel under the Rocky, Georgia Boot, Durango, Lehigh, and Michelin brand names. The company has a Zacks Rank #1, a VGM Score of B and has rallied 1% on Sep 18. The company’s projected growth rate for the current year is 46.6%, while the Shoes and Retail Apparel  industry is expected to rise 15%.

In the last 60 days, one earnings estimate moved north, while none moved south for the next year. The Zacks Consensus Estimate for earnings rose 13.3% in the same period. You can see the complete list of today’s Zacks #1 Rank stocks here.

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. The company has a Zacks Rank #2, a VGM Score of A and has rallied 0.6% on Sep 18. The company’s projected growth rate for the current year is 40.1%, while the Industrial Services industry is expected to rise 31%.

In the last 60 days, three earnings estimates moved north, while none moved south for the next year. The Zacks Consensus Estimate for earnings rose 1% in the same period.

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 Zacks Rank #2, a VGM Score of A and has rallied nearly 2% on Sep 18. The company’s projected growth rate for the current year is 69.3%, while the Manufacturing - Construction and Mining industry is expected to rise 2.3%.

In the last 60 days, 11 earnings estimates moved north, while none moved south for the next year. The Zacks Consensus Estimate for earnings rose 8.4% in the same period.

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