Benchmarks have tackled macroeconomic concerns from the other side of the pool to snatch significant gains for the first half of 2014. On the domestic front, benchmarks overcame headwinds including harsh winter weather, drop in first-quarter GDP and decline in Treasury yields to close in the green.
The Dow Jones Industrial Average (DJI.V), S&P 500 (INX.V) and NASDAQ Composite (:IXIC) boast gains of 1.5%, 6.1% and 5.5%, respectively, for the first half of 2014. The S&P 500 has hit record highs on 22 occasions so far this year. Also, it has the best lead over the Dow since 2009 and the seventh best lead since 1929.
The S&P 500 and the Nasdaq registered their sixth-straight quarter of gains. Separately, the S&P 500 marked its biggest second-quarter gain since 2009. The blue-chip index too recorded gains in five out of the last six quarters.
Synopsys of Monthly Performance
January – Following a robust Bull Run in 2013, benchmarks began 2014 on a sour note. The beginning of 2014 witnessed three consecutive days of losses that led the S&P 500 to its worst start to a year since 2005. The blue-chip index plunged 5.3%, S&P 500 was down 3.6% and Nasdaq ended the month with 1.7% decline. This was the blue-chip index’s worst start since 2009.
February – The Dow and S&P 500 rose 4% and 4.3%, respectively. The Dow recorded its largest monthly percentage gain since January 2013. The Nasdaq increased 5% for the month, its biggest monthly gain since September 2013.
March – The Dow and S&P 500 rose 0.8% and 0.7%, respectively. In contrast, the Nasdaq lost 2.5%, its worst performance since Oct 2012.
April – The Dow and S&P gained 0.8% and 0.6%, respectively, for the month. The tech-heavy Nasdaq slipped 0.2%.
May – The S&P 500, the Dow and the Nasdaq gained 2.1%, 0.8% and 3.1%, respectively. May’s gains helped the Nasdaq and the blue-chip index turn positive for the year.
June – The S&P 500 registered its fifth successive month of gains. The index gained 1.9% over the month. The Dow and the Nasdaq also gained 0.7% and 3.9%, respectively, over the month.
Political clashes were the major global headlines during this period, while Chinese economic data also guided our benchmarks. Separately, ECB’s monetary stimulus actions kept the markets moving. On the home front, Fed’s decision and hints regarding the low interest rate environment and trimming of the bond buyback plan were major movers. Economic data was mostly mixed, but the GDP numbers were largely on the negative side.
Investors were jittery at the start of the year owing to the second $10 billion cut to the economic stimulus plan. This was among the primary reasons for the benchmarks’ sharp decline in January.
However, assurances by the Fed Chairwoman Janet Yellen about economic recovery calmed the nerves thereafter. In Yellen’s first testimony before lawmakers after taking the Fed chair, she emphasized that interest rates would continue to be low. Later in February, Janet Yellen blamed the harsh winter climate for the weakness in the economy.
In June, markets were positively impacted after the Federal Open Market Committee (:FOMC) allayed fears of near-term rate hikes, but tweaked target interest rate forecasts. Further, the Fed reduced its monthly asset repurchase plan. The asset repurchase plan currently stands at $35 billion a month.
Yellen also provided an impetus to the markets with the comment that the central bank will consider a “wide range of indicators” on the labor market for decisions on rate hikes. She also said: “Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter.”
Impact of Global Issues
Rising political tension between Russia and the West over Crimea severely affected markets on certain days mostly during March-April. The Crimean crisis had dragged the benchmarks down to their worst fall in over five weeks on March 14.
Russia ignored all warnings from the West to take ownership of the Crimean region. The U.S. President penalized Moscow by freezing personal assets and banning travels for a number of Putin’s allies, as well as forbidding several Russian companies from doing business with U.S. firms. (Read: Russia-Ukraine Crisis Deepens: Key Stocks in Focus)
Economic data from China were largely on the negative side from the beginning of this year. In January, the HSBC preliminary survey showed a contraction in China’s manufacturing sector. In March, larger-than-expected decline in Chinese exports of 18.1% year over year raised concerns of a slowdown in the world’s second-largest economy.
Recently, HSBC preliminary manufacturing PMI increased to a seven month high of 50.8 in June. The dismal economic readings had prompted the Chinese authorities to come out with a mini-stimulus package a few months back and the positive effects may have started. China’s government authorities have set a 7.5% GDP growth target, while growth in Q1 came short of that target.
Announcement of stimulus measures by the ECB were welcomed by investors. Benchmarks notched record highs early in June after ECB reduced its key interest rates. The refinancing rate was lowered to 0.15% from 0.25% and the marginal lending facility rate was reduced to 0.40% from 0.75%. ECB also cut the deposit rates to -0.10%; thereby becoming the first central bank to have a negative rate.
Additionally, ECB deployed a series of targeted long term refinancing operations in an effort to boost bank lending to the non-financial private sector in the Eurozone.
The latest concern for the markets has been the sectarian clashes in Iraq. Markets have been negatively affected on certain days in June as investors are concerned about oil supply disruption from Iraq. The al-Qaeda connected Sunni militant group – the Islamic State in Iraq and Syria (ISIS) – has captured key towns in Iraq, where Iraq’s biggest oil refinery is located.
However, the energy sector has been the only gainer from this, as oil prices shot up. Oil prices rose to their highest level in nearly nine months early June. (Read: Crude Rallies on Iraq Conflict: Oil Stocks in Focus)
The Energy Select Sector SPDR (ETF) gained 5.0% last month while the broader markets remained jittery.
U.S. Economic Data
Nonfarm Payroll Data
A surprise weaker-than-expected US jobs report left investors worried about betting big on equities in January. It was reported in January that nonfarm payroll employment moved up 74,000 in December. This was significantly below the consensus estimate of a gain of 192,000.
However, the nonfarm payroll data has been positive thereafter; suggesting improving labor conditions this year.
According to the U.S. Bureau of Labor Statistics, total nonfarm payroll employment had risen to 113,000 in January. This was short of the consensus estimate of a jump to 189,000. However, unemployment rate had fallen to 6.6%, a five-year low. The lower-than-expected job additions did not affect markets much as investors focused on the drop in unemployment rate.
Nonfarm payroll employment had jumped to 175,000 in February from 129,000 in January. The rise came despite the harsh winter weather. Total nonfarm payroll employment had risen to 192,000 in March. Benchmarks had opened higher on May 2 after the total nonfarm payroll employment was reported to have jumped to 288,000 in April. The economy added the most number of jobs in April since Jan 2012.
Encouraging May’s nonfarm payroll report had also led benchmarks to record highs on Jun 6. Total nonfarm payroll employment jumped 217,000 in May, more than the consensus estimate of a rise by 213,000. Unemployment rate stayed at 6.3% in May.
The third and final data for real gross domestic product ("GDP") shows that the U.S. economy is faltering. The Bureau of Economic Analysis reported GDP shrunk 2.9% in the first quarter of 2014 contrary to the second estimate of 1% decline and the first estimate of 0.1% increase. This is the worst performance since five years. In the fourth quarter of 2013, real GDP had advanced 2.6%.
However, investors ignored the biggest contraction of the U.S. economy in the first quarter since early 2009 as the report did not impact benchmarks negatively the following day. (Read: U.S. GDP Decline: Real or Just a Mirage of Derailing Economy?)
3 Best Performers
Here are the top 3 stocks of the first half of 2014. These stocks have gained the most during this period and also boast Zacks Rank #1 (Strong Buy).
Emerge Energy Services LP (EMES) is an operator and developer of energy services assets in US. While the company’s Sand Production segment produces industrial sand used mostly in oil extraction. The Fuel Processing segment sales wholesale petroleum products and also operates 2 terminals and 2 transmix processing facilities. The diversified energy services company was founded in 2012.
Emerge Energy Services has gained 138.7% year to date. The stock has witnessed upward estimate revisions over the last 90 days. Current quarter estimates have jumped from 72 cents to 82 cents, while current year estimates jumped to $3.47 from $3.03 during this period.
The stock was upgraded to Zacks #2 (Buy) on Jan 15 and then downgraded to a Zacks Rank #3 (Hold) on Mar 18. However, it remained a Buy-rated stock for most of the 6-month period.
Vipshop Holdings Limited (VIPS) is an online discount retailer in China. It offers branded apparel, fashion goods, home goods and lifestyle products. The company sells products through its websites - vipshop.com and vip.com as well as through phone application. The company was founded in 2008.
The stock has gained 124.5% year to date and witnessed positive estimate revision trend over the last 90 days. Current quarter estimates have jumped from 44 cents to 47 cents, while current year estimates jumped to $2.32 from $2.09 during this period.
The stock was upgraded to Zacks Rank #1 on Jan 2. It dropped to a Zacks Rank #3 on Jan 14 before being upgraded to a Buy-rated stock on Jan 30.
Pioneer Energy Services Corp. (PES) is a provider of contract land drilling services. It has a fleet of 62 drilling rigs and offers services to oil and gas exploration and production firms. Its services also include well servicing, wireline services and coiled tubing services. The company was founded in 1968 and was formerly known as Pioneer Drilling Company.
The stock has gained about 119% year to date. There were solid upward estimate revisions over the last 90 days for this stock as well. Current quarter estimates have jumped from 2 cents to 6 cents, while current year estimates jumped to 26 cents from 6 cents during this period.
The stock was upgraded by two notches to Zacks Rank #1 on Jan 2. The rating had dropped to a Hold on three occasions in the last six months.Read the Full Research Report on PES
Read the Full Research Report on VIPS
Read the Full Research Report on EMES
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