The U.S. economy has witnessed several ups and downs this year. While weak global economic growth outlook weighed on the stocks, federal measures like rate cuts boosted the domestic economy. Markedly, after 17 months, trade tensions between Washington and Beijing are slowly easing, giving ample boost to the stock market. Let’s delve into the factors that had significant impact on the economy this year, which moved the stock market.
Factors Influencing the Economy:
Slowing Trade Conflicts
In the past several quarters, the United States and China levied tariffs on each other’s goods, which resulted in a slowdown in global economy. As expected, this significantly affected the stock market. However, with the two big economies agreeing to the terms of a historic phase-one trade deal, investors are hopeful for better days ahead.
As part of the agreement, the United States will likely halve the 15% tariff rate levied on Sep 1 on a list of Chinese goods worth $120 billion. Moreover, it called off the 15% tariff plan, which was scheduled to be implemented on $160 billion Chinese goods on Dec 15. China, on the other hand, didn’t proceed with the retaliatory tariff plan of 25% on American autos. Also, the world’s second-biggest economy is expected to increase imports of American goods (agricultural, energy, manufacturing and others) by at least $200 billion over the next two years.
While investors are waiting for the deal to be signed within the first week of January 2020, the market is optimistic about the second phase that might include data localization, digital trade, cyber intrusions and cross-border dataflow.
In 2019, the Federal Reserve reduced interest rate thrice, which currently lies in the range of 1.50-1.75%. This provided constant support to the domestic economy. Importantly, in its year-end meeting, the Fed announced that it will hold interest rates steady throughout the next year. This boosted investor confidence and demand growth, making a record of 11th yearly economic expansion. The impact of the stimulant is clearly visible from the strengthening labor market, which is evident from the economic data stated below.
Favorable Economic Data
Unemployment rate plunged to a 50-year low of 3.5% in November as 266,000 new jobs were generated in that month alone. With the job market holding up, investors are upbeat about economic performance in the next year.
The strong labor market, low mortgage rates and favorable demographics are expected to drive the domestic homebuilding market. Notably, this month, builder confidence reached the highest level of 76 points in the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index since June 1999.
Domestic industrial production increased 1.1% in November from the prior month, marking the biggest jump since October 2017. It was supported by the end of the 40-day strike of auto workers involving 48,000 personnel.
The United States reported the lowest trade deficit in 16 months as the metric contracted 7.6% to $47.2 billion in October from September’s revised data of $51.1 billion. Importantly, the University of Michigan’s U.S. consumer sentiment rose to 99.2 points in December, beating market estimates of 97. This positive sentiment in the domestic economy is best reflected in the stock movements of small and mid-cap companies. These companies are touted to be the true reflectors of economic growth.
Significance of Small and Mid-Cap Companies
With large-cap companies having significant international exposure, small and mid-cap companies can portray the domestic economic scenario more prominently. These small-cap stocks generally tend to outperform their large-cap peers on the back of improving financial health, as these are less susceptible to global concerns.
Notably, these companies have created more than 50% of the new jobs in the private sector. Moreover, small companies constitute a major portion of the supply chain management systems for large-cap companies with innovative and technological inputs. As such, the Russell 2000 is an appropriate indicator of the domestic economy. Reflecting the bullish sentiment of the market, the index rose 22% year to date, with majority of the rally witnessed in the latter part. Thus, we suggest you to place your bet on these small-cap stocks, as these are expected to lead to lucrative returns.
Stocks That Outperformed Russell 2000
While Russell 2000 is currently hovering near the 52-week high range, we have selected such stocks that have even fared better than the index. Such stocks are poised to gain even further in the near term based on an improving domestic economy and benefits from lower interest rates.
These stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of B or better. You can see the complete list of today’s Zacks #1 Rank stocks here.
Also, the stocks have been witnessing positive earnings estimate revisions, which generally translate into rapid price appreciation.
Aegion Corporation AEGN provides solutions to rehabilitate aging infrastructure, primarily pipelines in the wastewater, water, energy, mining and refining industries. It holds a Zacks Rank #2 and has a VGM Score of B. The Zacks Consensus Estimate for the current fiscal year is $1.23 per share, indicating a 3.4% year-over-year increase. The company has returned 43.6% year to date and boasts a market cap of $747 million.
Spartan Motors, Inc. SPAR develops, assembles, and sells heavy-duty and vehicles in the United States and international markets. The Charlotte, MI-based company has a market cap of $607 million and its shares have increased 141.8% in the year-to-date period. The company has a Zacks Rank #2 and a VGM Score of B. Its bottom line is expected to grow 85.4% year over year in 2019.
Foundation Building Materials, Inc. FBM is a specialty distributor of wallboard and suspended ceiling systems primarily in the United States and Canada. The Tustin, CA-based company has a market cap of $826 million and gained 130.8% year to date. It has a Zacks Rank #1 and a VGM Score of B. The company’s earnings per share are expected to surge 148.8% this year.
Ichor Holdings, Ltd. ICHR is engaged in the design, engineering and manufacturing of critical fluid delivery subsystems for semiconductor capital equipment. The company, with a market cap of $778 million, has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for the current year has been revised 11% upward over the past 60 days. The stock has rallied 107.6% so far this year.
Jounce Therapeutics, Inc. JNCE is a clinical-stage immunotherapy company. It is engaged in developing therapies that enable the immune system to attack tumors. The company has a Zacks Rank #1 and a VGM Score of B. The company has a market cap of $268 million and surged 137.1% year to date. The Zacks Consensus Estimate for the current year has moved 17.1% upward over the past 60 days.
Zacks Top 10 Stocks for 2020
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