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Top Wall Street Stories of the Third Quarter

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Though escalation in U.S.-China trade tensions, emerging market meltdown, inflationary pressures and rounds of tech sell-off played spoil sport in the third quarter, the Wall Street has extended its largest bull run. The dual tailwinds of solid corporate earnings and a booming economy are acting as major catalysts. Additionally, higher oil price and slew of upbeat data have bolstered confidence in the economy, leading to risk-on trade.

Below we discuss some of the events that dominated the headlines in the third quarter and influenced the market:

Pot Stocks: The Hot Spot

Like bitcoin in 2017, pot stocks made investors go on a mad rush this year. The enthusiasm is driven by Canada’s legalization of recreational marijuana effective Oct 17 that has paved the way for a merger mania, spurring a large number of deal activities and waves of weed stocks IPO.

Canadian cannabis producer Tilray (TLRY - Free Report) , which debuted on Nasdaq in July at $17, has grabbed most of the attention in September following the approval from the US Drug Enforcement Administration to import a cannabinoid study drug into the United States. The stock has surged more than 700% since its debut.

A number of alcoholic beverage companies are showing interest in partnering with cannabis producers, the latest being Coca-Cola (KO - Free Report) , which is in talks with Canada’s Aurora Cannabis to develop cannabidiol infused beverages. Diageo (DEO - Free Report) is also in talks with three Canadian pot producers for buying a stake or forming a partnership to produce cannabis-infused beverages. Constellation Brands (STZ - Free Report) recently invested $3.8 billion to increase its stake to 38% in Canopy Growth CGC in the biggest marijuana industry deal so far. Notably, Canopy Growth made its debut on the NYSE in May and is up about 76% since then.

Molson Coors (TAP - Free Report) is also entering into a joint venture with Hydropothecary to develop marijuana drinks in Canada while Heineken (HEINY - Free Report) -owned Lagunitas launched a THC-infused sparkling water in California dispensaries on Jul 30.

Fed Raises Rates for the Third Time

As expected, the Fed has raised interest rates again in September, making it the third hike of 2018 and the eighth hike since December 2015. The central bank is on track for a fourth rate hike in December, citing strong economy, rising inflation and a strengthening job market. As such, cyclical sectors like financials, consumer discretionary and technology are expected to benefit from a rising rate environment.

Some of the top-ranked stocks from these spaces saw a huge surge in their share price year to date. These include On Deck Capital (ONDK - Free Report) , up 27.5%; Guess Inc. (GES - Free Report) , up 35.3%; and Unisys Corporation (UIS - Free Report) , up 149.1%. The trio has a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of B or better, suggesting their continued outperformance in the months ahead. Further, these stocks are expected to witness solid earnings growth this fiscal (ONDK – 4,200%, GES – 48.57% and UIS – 250%). You can see the complete list of today’s Zacks #1 Rank stocks here.

More Tariff Tantrums

President Trump has imposed a new tariff of 10% on $200 billion worth of Chinese goods starting Sep 24. The tariff will be increased to 25% effective Jan 1. In retaliation, China slapped a tariff of 10% on more than 5,000 American products worth $60 billion. The latest move has escalated tensions between the two largest economies of the world.

Trump has further threatened to add third round of tariffs on another $267 billion of Chinese imports. This would raise the total tariff to $517 billion in goods, which would mean levying duties on nearly everything China exports to the United States. The latest tariff comes on top of the $50 billion that is already in place with 25% duty. China has also hit back with tariffs of equivalent amount of U.S. exports.

That said, semiconductor companies, which have large exposure to China, took a huge beating in the third quarter, with Applied Optoelectronics (AAOI - Free Report) declining 38.3%. The stock has a Zacks Rank #3 (Hold) and a VGM Score of B.

Market Hits Record High

The S&P 500 touched the major milestone of 2,900 for the first time in history on Aug 28 and the Dow Jones soared to its first record high on Sep 20 since late January. This suggests that the stock market is showing strong complacency, shrugging trade war fears, and the trend is likely to continue. While most of the top-ranked stocks are set to surge, Turtle Beach Corporation (HEAR - Free Report) and Denbury Resources Inc. (DNR - Free Report) seem lucrative picks. Turtle Beach has gained more than 1000% so far this year and has an estimated earnings growth of 1,004.17% for this fiscal while Denbury is up 179% with an expected earnings growth rate of 242.86%. Both the stocks have a Zacks Rank #2.

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