Markets started the New Year on a strong note, posting fresh records on multiple occasions. Newly instituted tax cuts had a beneficial impact on stocks with the Dow breaching the 25,000 and 26,000 mark in the same month.
Economic data remained strong even as fourth-quarter earnings promised to be the most bullish in recent times. Meanwhile, the Fed refrained from raising rates but indicated that a hike was more or less certain in March.
For the month of January, the Dow, the S&P 500 and the Nasdaq increased 5.8%, 5.6% and 7.4%, respectively. The passage of the Tax Cuts and Jobs Act of 2017, which permanently slashed corporate tax rates from 35% to 21%, last December contributed to January’s gains. Additionally, in its Beige Book, the Fed provided an encouraging outlook about the U.S. economy, which in turn also boosted investor sentiment.
Moreover, during the month, the Senate gave its consent to pass a short-term spending bill that ends the recent government shutdown. Additionally, an upbeat fourth-quarter earnings season, which includes a very strong revenue momentum, an above-average proportion of positive surprises and an unusually positive revisions trend for the current and coming quarters, also contributed to strong market performance.
Benchmarks Breach Multiple Records
Key indexes achieved multiple milestones over last month. On Jan 2, the Nasdaq closed above the 7,000 mark for the first time. On the very next trading day, the S&P 500 moved past 2,700 for the first time. Optimism over strong market performance in 2018 contributed to these gains.
On Jan 4, the Dow touched the psychological level of 25,000 for the first time. This was the blue-chip index’s fastest 1,000-point rise since its inception in May 1896. On Jan 9, the S&P 500 gained 3.6 points to close at a record for the sixth straight session. This marks its best start to a year since 1987.
On Jan 17, the Dow finished above 26,000 for the first time. Additionally, both the Dow and S&P 500 posted their best 11-trading day start for the first time in a year since 1987, following which bond yields and the U.S. dollar increased. Benchmarks hit record levels again on Jan 22, after the Senate gave its consent to the bill.
Finally, on Jan 26, all three U.S. benchmarks closed at record levels following better-than-expected earnings. The S&P 500 finished at a record level for 14 trading days, its best such feat in a month since June 1955. The index also posted its best one-day rise since Mar 1, 2017. Additionally, the Dow posted a rise of more than 220 points, while the Nasdaq registered its biggest one-day gain since Jan 2.
Bullish Domestic Data
Economic data released during November was largely encouraging in nature. The ISM manufacturing index rose to 59.7% in December and reached its highest settlement in the last two years. Construction increased 0.8% from downwardly revised October figure to its highest level on record. Factory orders surged 1.3% during the month of November. CPI and core-CPI gained 0.1% and 0.3%, respectively, in December.
Additionally, retail sales increased 0.4% in December, increasing for the fourth straight month and ended 2017 on a high. Industrial production for December surged 0.9%, surpassing the consensus estimate of 0.4%.Consumer spending increased 0.4% in October, in line with the consensus estimate for the period. Core PCE Inflation for December came in at 0.2%, higher than the previous month’s figure of 0.1%.
However, ISM Services Index for December declined 1.5 points to 55.7%. U.S. trade deficit increased 3.2% in November to settle at $50.5 billion. This is the highest level of deficit since January 2012. Meanwhile, PPI for the month December 2017 decreased 0.1%. This was the index’s first decline in 10 months. However, Core PPI shot up 0.2%.
Housing Sector Softens
A certain degree of softness afflicted the housing sector in January. The confidence level among the nation’s homebuilders slipped slightly in the first month of 2018 after reaching an 18-year high in December 2017, according to the National Association of Home Builders’ (NAHB) Housing Market Index. The January 2018 reading was down two points to 72 from the December level of 74.
Also, housing starts declined by 8.2% in December, the largest percentage drop recorded since November 2016. However, industry watchers believe that the downturn experienced in December is likely to be temporary. Further, housing possibly felt the chill from December’s brutally low temperatures.
Meanwhile, existing-home sales slipped 3.6% in December to a seasonally adjusted annual rate of 5.57 million units from a downwardly revised 5.78 million in November after three straight months of strong increases.
Also, new home sales came in at 625,000 units for December, lower than the consensus estimate of 684,000. Only pending home sales increased 0.5% over last month after housing supply hit a record low.
Q4 GDP Slips, Growth Stretch Best Since 2009
U.S. GDP increased at a seasonally adjusted annual rate of 2.6% in the final three months of 2017 following gains of more than 3% in the two previous quarters, as per the “advance” estimate released by the Bureau of Economic Analysis. In fact, this marked the economy’s strongest stretch of growth since the expansion started in mid-2009.
The economy was boosted by solid consumer spending, which increased at 3.8% over the quarter after a 2.2% gain in the third quarter. Consumer outlays registered its fastest pace of growth in the fourth quarter in almost two years. Companies also ramped up spending in the fourth quarter by 6.8%. Among other bright spots, government spending also increased at a clip of 3%
Job Additions Fall, Unemployment Stays Flat
Nonfarm payrolls additions for the month of December came in at 148,000, lower than the consensus estimate of 190,000. Moreover, the unemployment rate for December remained stagnant at 4.1%, in line with the consensus estimate of 4.1%. The jobless rate has remained at the same level for two consecutive months.
The average hourly earnings for December surged 0.3%, also in line with the consensus estimate. The average workweek for the last month came in at 34.5 hours, remaining constant with the figure for the last month.
Q4 Earnings Reflects All-Round Strength
A slew of earnings results from major banks kicked off the fourth-quarter earnings season. JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc (NYSE:GS) Bank of America Corp (NYSE:BAC) and U.S. Bancorp (NYSE:USB) all posted impressive performances. Intel Corporation (NASDAQ:INTC), AbbVie Inc (NYSE:ABBV) and Honeywell International Inc. (NYSE:HON) also posted encouraging earnings numbers.
Total Q4 earnings for the 185 S&P 500 members that have reported results are up 13.3% from the same period last year on 8.2% higher revenues, with 82.2% beating EPS estimates and 80% beating revenue estimates as of Jan 31.
Q4 earnings growth for Energy is the highest of all sectors, with total earnings for the space expected to be up 185.1% from the same period last year on 25.2% higher revenues. Excluding the Energy sector, total Q4 earnings for the rest of the S&P 500 index would be up 9.2%.
Earnings growth is expected to be strong for the Technology sector, with total Q4 earnings for the sector expected to be up 17.4% on 9.5% higher revenues. Finance sector earnings are expected to be up 5.4% on 2.6% year-over-year growth in revenues.
Fed Leaves Rates Unchanged, Hike Likely in March
On Jan 31, the Federal Reserve opted to leave benchmark rates unchanged within the 1.25-1.5% range. Nevertheless, Fed policymakers reckon three rate hikes for this year, setting the stage for an imminent increase in March under Jerome Powell. The two-day policy meeting that concluded yesterday was the last overseen by Janet Yellen. Her post is set to be taken by Powell.
In its two-day Federal Open Market Committee (FOMC) policy statement following the meeting ended Jan 31, the Fed indicated that economic activity has increased at a “solid rate” and will continue to grow at a “moderate pace.”
Additionally, per the statement, labor market remains strong, while inflation will likely “move up” in 2018 and will reach the desired 2% rate in the “medium term.” The FOMC also said federal funds rate is likely to increase at a “gradual” pace in coming months.
5 Star Performers for January
I ran a screen on Research Wizard for companies with the following parameters:
- Percentage price change over the last 4 weeks greater than or equal to 20%
- Forward price-to-earnings ratio (P/E) for the current financial year (F1) less than or equal to 20. This picks out stocks that are good value choices
- Expected earnings growth for the current financial year greater than or equal to 20%
- Zacks Rank less than or equal to 2: This ascertains stocks that have shown above-average returns over the last 26 years.
Here are the top 5 stocks that made it through this screen. Each of these has a Zacks Rank #2 (Buy).
KEMET Corporation (NYSE:KEM), along with its subsidiaries, is a manufacturer and seller of passive electronic components.
Price gain over the last 4 weeks = 27.2%
KEMET’s expected earnings growth for the current year is more than 100%. The stock has a P/E (F1) of 13.10x.
OneMain Holdings Inc (NYSE:OMF) is a consumer financial services holding company.
Price gain over the last 4 weeks = 25.6%
Expected earnings growth for current year = 26.9%
OneMain Holdings has a P/E (F1) of 7.41x.
Ichor Holdings Ltd (NASDAQ:ICHR) is engaged in the design, engineering and manufacturing of critical fluid delivery subsystems for semiconductor capital equipment.
Price gain over the last 4 weeks = 24.4%
Expected earnings growth for current year = 45.1%
Ichor Holdings has a P/E (F1) of 8.97x.
Petroleo Brasileiro SA (NYSE:PBR) or Petrobras S.A. is the largest integrated energy firm in Brazil and one of the largest in Latin America.
Price gain over the last 4 weeks = 24.3%
Expected earnings growth for current year = 70.4%
Petrobras has a P/E (F1) of 10.99x.
AmTrust Financial Services Inc (NASDAQ:AFSI) is the 15th largest specialty property and casualty (P&C) insurer in the United States, providing insurance coverage for small businesses and products with high volumes.
Price gain over the last 4 weeks = 24.3%
Expected earnings growth for current year = 55.1%
AmTrust Financial Services has a P/E (F1) of 9.18x.
Will Benchmarks Breach more Records in February?
Investors have had little to worry about except the recent specter of rising bond yields. The situation has been exacerbated by growing prospects of a rate hike in March. Higher rate environment and optimism of steady economic growth and higher inflation have weighed on bond prices, sending yields higher.
However, effective signaling on the part of the Fed is likely to result in investors pricing in this decision well before the hike actually takes place. Ultimately, a strong fourth-quarter earnings season and steady economic growth are likely to propel markets toward new milestones in the weeks ahead.
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