U.S. stocks tumbled last month as news of the coronavirus outbreak drove investors away from risky assets like stocks to traditional safe-havens like Treasury securities and cash. But let’s admit, the bull market is much in charge this month and has plenty of room to run for the rest of the year.
The broader S&P 500, for instance, declined to as low as 3,214 before jumping in February with an array of record highs. And the market continues to be at its loftiest level despite the virus death toll crossing 1,000 and confirmed cases increasing to more than 44,000.
Here are the reasons why U.S. stocks shrugged off the coronavirus scare –
Risk of Contagion – Slowing
Even though the coronavirus outbreak surpassed SARS’ death toll, latest data from China's National Health Commission showed that the spread of infection has slowed down. No doubt, 108 deaths were reported in the previous 24 hours in mainland China. But the number of new confirmed cases has dropped from 3,062 a day earlier to 2,478, which in turn drove investor optimism.
And any outbreak, by the way, has never lasted more than a few months. Viruses come, spread, peak and eventually subside. Similarly, their impact on the economy is short-lived, and thus economic activity rebounds shortly after the virus dies down.
US Economy in the Pink
Talking about the economy, both domestic manufacturing and service activities increased recently, and the labor market continues to remain on a solid footing, a tell-tale sign that the economy is doing well despite the emergence of the deadly virus.
According to the Institute of Supply Management, its manufacturing index climbed to 50.9 in January from an upwardly revised 47.8 in December. The index scaled beyond the 50 mark, which separates expansion from contraction. Analysts, by the way, were expecting a reading of 48.5. Strength in new orders, production and employment supported the gains.
The non-manufacturing index came in at 55.5 in January, topping analysts’ estimate of 55. It was also higher than the December reading of 54.9. The non-manufacturing sector, thus, saw uninterrupted expansion for the 120th consecutive month and indicated that the broader economy is on track for steady growth this year. After all, the non-manufacturing sector accounts for nearly 90% of the economy, while any reading above 50 indicates that the said sector is expanding.
And when it comes to the labor market, the United States added a heartening 225,000 jobs last month, way higher than analysts’ expectations of 160,000 jobs. It was also up from December’s upwardly revised number of 147,000, per the Labor Department. In addition to December’s positive revision, non-farm payrolls for the month of November increased by 5,000 to 256,000. And that means the economy added an average of 211,000 new jobs in the past three months, a significant rise from last summer. What’s more, such encouraging numbers suggest that the labor market was in a better shape toward the end of last year.
The unemployment rate, in the meantime, did edge up to 3.6% from a 50-year low of 3.5%. But it’s mostly due to a greater number of people entering the labor force. And it’s a good sign, as there could be still more room for the labor market to grow.
Low Interest Rate Environment
The current low interest environment should make the cost of borrowing manageable, helping companies invest and grow. This in turn should help the economy gain momentum.
What’s more, the Fed is expected to keep its monetary policy on hold after trimming rates three consecutive times last year to stimulate the economy. Fed Chair Jerome Powell had said that there is no immediate need to increase the federal fund’s rate unless there is a constant upward movement in inflation.
China’s Positive Initiatives
Coming back to the virus outbreak, the Chinese government has injected stimulus and halved tariffs on U.S. commodities, something that drove the U.S. stock market.
The People’s Bank of China offered funds in the overnight market to the tune of $71 billion to alleviate the economic stress associated with containing of the outbreak. The central bank particularly wanted to encourage lending to struggling business houses.
Meanwhile, in order to promote Sino-U.S. trade relationship, China’s Ministry of Finance said that 10% tariffs on some of U.S. commodities would be cut to 5%, while those with 5% tariffs will be trimmed to 2.5% starting Feb 14.
5 Top Growth Stocks to Buy Now
A slowdown in new cases of COVID-19 in China, and Beijing’s initiatives to boost economy as well as improve trade relations will continue to drive the U.S. stock market. What’s more, U.S. stocks are heavily exposed to the U.S. economy where the data continues to improve. And even if skeptics worry about the virus outbreak, developed markets are still considered more stable than any emerging market during times of uncertainty.
With the investing case in U.S. stocks remaining encouraging, we have selected five stocks that are poised to gain in the near term. These stocks sport a Zacks Rank #1 (Strong Buy) along with a Growth Score of A.
Accuray Incorporated (ARAY - Free Report) designs, develops, and sells radiosurgery and radiation therapy systems for the treatment of tumors in the body. The company was incorporated in 1990 and is headquartered in Sunnyvale, CA. The Zacks Consensus Estimate for its current-year earnings has moved up more than 100% over the past 60 days. The company’s expected earnings growth rate for the next quarter is 200%.
MagnaChip Semiconductor Corporation (MX - Free Report) designs, manufactures, and sells analog and mixed-signal semiconductor platform solutions for communications, IoT, consumer, industrial, and automotive applications. MagnaChip Semiconductor is based in Luxembourg City, Luxembourg. The Zacks Consensus Estimate for its current-year earnings has climbed more than 100% over the past 60 days. The company’s expected earnings growth rates for the current and next quarter are both 100%.
Rite Aid Corporation (RAD - Free Report) operates a chain of retail drugstores in the United States. It was founded in 1927 and is headquartered in Camp Hill, PA. The Zacks Consensus Estimate for its current-year earnings has risen more than 100% over the past 60 days. The company’s expected earnings growth rate for the current quarter is 30%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Vericel Corporation (VCEL - Free Report) is a commercial-stage biopharmaceutical company. The company was founded in 1989 and is headquartered in Cambridge, MA. The Zacks Consensus Estimate for its current-year earnings has moved 4.2% north over the past 60 days. The company’s expected earnings growth rate for the current and next quarter is 90.9% and 71.4%, respectively.
RGC Resources, Inc. (RGCO - Free Report) operates as an energy services company. The company was founded in 1912 and is based in Roanoke, VA. The Zacks Consensus Estimate for its current-year earnings has risen 1.8% over the past 90 days. The company’s expected earnings growth rate for the next quarter and current year is 14.3% and 4.6%, respectively.
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