Markets notched up another month of gains following the release of positive economic data and encouraging corporate earnings. The euphoria around Trump’s election helped stocks notch up gains over a large part of the month. However, his pronouncements since assuming office have heightened concerns among investors. Meanwhile, the Federal Reserve has expressed confidence in the economy and indicating that is likely to quicken the pace of rate hikes.
For the month, the Dow, S&P 500 and Nasdaq increased 0.5%, 1.8% and 4.3%, respectively. This was the third consecutive round of monthly gains for the major benchmarks. Forecasts for an improvement in economic growth and bullish corporate earnings propelled US stocks to log there first gains in January in five years. Stocks rallied on hopes that the new administration’s policies, including lowering of taxes and cutting regulations, will bolster economic growth.
The materials sector has fueled the rally, after moving 5.1% higher so far this year, following a 14% gain in 2016. Companies from the sector are gaining from Trump’s infrastructure spending promises and a rise in the price of many raw materials. Technology shares have also recorded sharp gains this year after trailing the broader market last year. The sector has risen 3.6% in January, its best monthly increase since last July.
Positive Domestic Data
Most of the economic reports released during the month were encouraging in nature. The ISM manufacturing index increased while the services index remained flat for the month of December. Retail sales jumped 0.6% in December following an upwardly revised 0.2% gain in November. Industrial production rose 0.8%, rebounding from a 0.7% decline in November. The Leading Indicators Index gained 0.5% in December following a revised increase of 0.1% in November.
CPI and PPI both moved up 0.3% in December. Construction spending increased by 0.9% in November to the highest level recorded since April 2006. However, a few key reports were negative in nature. While durable orders fell by 0.4%, consumer confidence dropped to 111.8.
Q4 GDP Disappoints
According to the “advance” estimate by the Bureau of Economic Analysis, the fourth quarter output of goods and services increased at a seasonally adjusted annual rate of 1.9% from the previous three months. This was lower than the consensus estimate of 2.2% growth. A widening in the foreign-trade deficit weighed on growth during the final three months of 2016. In the fourth quarter, exports fell 4.3%, its biggest decline since the first quarter of 2015.
But key bulwarks of the economy such as consumer spending and business investment picked up, while home construction rebounded after two straight quarters of decline. Consumer spending increased by a solid 2.5%, while business investment pushed higher, with spending on equipment increasing 3.1%. Another bright spot was the housing sector, with residential investment increasing 10.2%.
Housing Sector Softens
However, housing seems to be battling a number of challenges at this point. On the positive side, housing starts jumped 11.3% in December but building permits declined 0.2%. The National Association of Home Builders (NAHB) Housing Market Index declined from 69 to 67 in January. Despite this decline, the index remains at an encouraging level.
But existing homes sales fell 2.8% in December from November to a seasonally adjusted rate of 5.49 million. New home sales slumped 10.4% to a seasonally adjusted rate of 536,000. Only, the pending home sales index increased 1.6% in December to 109.0.
Job Additions Decline, Hourly Earnings Rise
The U.S. added 156,000 jobs in December, below the consensus estimate of 178,000 job additions. But, a sharp upward revision of November’s job numbers and a slight trimming of October’s job numbers indicated that employment growth was more or less in line with broader expectations. Steady gains in employment have pushed workers pay higher, with average hourly wages climbing 0.4% in December. This in turn pushed the annual gain last year to 2.9%, the fastest rise since the economy started to recover in mid-2009.
Meanwhile, the unemployment rate ticked up to 4.7% from 4.6% in November, matching the consensus expectation. Jobless rate edged up as more people entered the work force in search of work. The U6 unemployment rate that includes people forced into part-time work and people only sporadically looking for jobs, however, declined to 9.2%, the lowest since Apr 2008.
Earnings Growth Continues into Fourth Quarter
Earnings have registered another quarter of growth, closely following the trend set in the third quarter which snapped a 15-month decline. We now have results from 171 S&P 500 members that have reported as of Jan 30th. Total earnings for these 171 index members are up 6% from the same period last year on 3.1% higher revenues, with 64.3% beating EPS estimates and 54.4% beating revenue estimates. (read more: Is the Bar Higher for the Q4 Earnings Season?).
Finance companies have been the star performers for this quarter. Among the notable names reporting strong numbers were JPMorgan JPM, Morgan Stanley MS, Goldman Sachs GS, Citigroup C and US Bancorp USB.
For the Technology sector, total Q4 earnings are expected to be up +5.9% from the same period last year on +4.4% higher revenues. Both Microsoft MSFT and IBM IBM exceeded earnings and revenues estimates. iPhone maker Apple AAPL also reported a big earnings beat. Currently, oil earnings releases are underway with sector heavyweight ExxonMobil XOM beating both earnings and revenues estimates while rival Chevron’s CVX results missed expectations on both counts.
Trump Effect Wanes
The electoral promises and presidential actions of Donald Trump dominated headlines and guided markets over a large part of the month. Trump’s first press conference since July disappointed investors due to lack of policy detail. He also severely criticized pharmaceutical companies over high drug prices leading biotech stocks to wobble.
The U.S. dollar declined significantly against major currencies after Trump said in an interview on Jan 13 that China’s intention to devalue the yuan is a major factor behind strengthening the dollar. In the same interview, Trump strongly opposed Republicans’ corporate-tax plan, which was put forward as an alternative to Trump’s import tariffs.
After being sworn in as the 45th President of America, Donald Trump gave a protectionist speech, which in turn had a broad-based positive impact on U.S. benchmarks. The 45th U.S. President then announced that the U.S. has formally exited the Trans-Pacific Partnership. He has also said that he will meet with his Mexican and Canadian counterparts to renegotiate the North American Free Trade Agreement (NAFTA)
Subsequently, he signed two executive orders enabling the completion of the Dakota Access and Keystone XL oil pipelines. Trump then signed executive orders to improve border security and control immigration. His order to tighten immigration rules has led to markets closing in the red over the last few days.
Minutes from the Fed’s December meeting indicated that most of the Fed officials agreed “that a gradual pace of rate increases” this year would “be appropriate.” Additionally, some of Fed policymakers said "more expansionary fiscal policy" raised the possibility of "somewhat tighter monetary policy than currently anticipated."
The Fed raised interest rates in 2016 for the second time in last ten years. However, policymakers also said “prospect of expansionary fiscal policy had increased the upside risks to economic activity and inflation.”
5 Star Performers for January
I ran a screen on Research Wizard for companies with the following parameters:
(Click here to sign up for a free trial to the Research Wizard today):
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.
(See the performance of Zacks’ portfolios and strategies here: About Zacks Performance).
Here are the top 5 stocks that made it through this screen:
Forward Pharma A/S FWP is a biotechnology company focused on the development of immunomodulatory compound dimethyl fumarate and its derivatives.
Price gain over the last 4 weeks = 94.7%
Forward Pharma has a Zacks Rank #2 (Buy) and its expected earnings growth for the current year is more than 100%. The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 3.51x.
Pioneer Power Solutions, Inc. PPSI is a specialty manufacturer of electrical transmission and distribution equipment.
Price gain over the last 4 weeks = 47.9%
Expected earnings growth for current year = 50%
Pioneer Power Solutions holds a Zacks Rank #2. The stock has a P/E (F1) of 13.33x.
Hudbay Minerals Inc. HBM is a mining company and engages in discovery, production and marketing of base metals in North and South America.
Price gain over the last 4 weeks = 36.8%
Hudbay Minerals has a P/E (F1) of 17.84x and its expected earnings growth for the current year is more than 100%. The stock holds a Zacks Rank #1.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Applied Optoelectronics, Inc. AAOI designs, develops and manufactures advanced optical devices, packaged optical components, optical subsystems, laser transmitters and fiber optic transceivers.
Price gain over the last 4 weeks = 29.7%
Expected earnings growth for current year = 76.2%
Applied Optoelectronics holds a Zacks Rank #1. The stock has a P/E (F1) of 18.47x.
Ultra Clean Holdings, Inc. UCTT is a developer and supplier of critical subsystems for the semiconductor capital equipment, flat panel, solar and medical device industries.
Price gain over the last 4 weeks = 29.2%
Expected earnings growth for current year = 57.9%
Ultra Clean Holdings holds a Zacks Rank #2 and it has a P/E (F1) of 14.98x.
Will Stocks Gain Again in February?
At this point, the momentum gained following President Donald Trump’s election victory in November seems to be fading. Investors are now worried that his policies could increase volatility in the days to come. However, economic data and companies’ results have been largely bullish, though there are indications that the bar may have been set too high for fourth quarter earnings.
Meanwhile, the Fed is likely to hold off raising rates in its next meeting. In such an event, stocks could continue to gain in February if the new administration announces industry friendly measures soon.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017?
Who wouldn't? As of early December, the 2016 Top 10 produced 5 double-digit winners including oil and natural gas giant Pioneer Natural Resources which racked up a stellar +50% gain. The new list is painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. Be among the very first to see it>>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
International Business Machines Corporation (IBM): Free Stock Analysis Report
J P Morgan Chase & Co (JPM): Free Stock Analysis Report
U.S. Bancorp (USB): Free Stock Analysis Report
Citigroup Inc. (C): Free Stock Analysis Report
Ultra Clean Holdings, Inc. (UCTT): Free Stock Analysis Report
Apple Inc. (AAPL): Free Stock Analysis Report
Microsoft Corporation (MSFT): Free Stock Analysis Report
Applied Optoelectronics, Inc. (AAOI): Free Stock Analysis Report
Morgan Stanley (MS): Free Stock Analysis Report
Goldman Sachs Group, Inc. (The) (GS): Free Stock Analysis Report
Forward Pharma A/S (FWP): Free Stock Analysis Report
HudBay Minerals Inc (HBM): Free Stock Analysis Report
Chevron Corporation (CVX): Free Stock Analysis Report
Exxon Mobil Corporation (XOM): Free Stock Analysis Report
Pioneer Power Solutions, Inc. (PPSI): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research