The U.S. economy is on the verge of completing a calendar decade without recession for the first time in history. In July 2019, the economy officially entered into the longest stretch of economic expansion at least since 1854.
According to the National Bureau of Economic Research (NBER), the country is in the 126th month of economic expansion, outpacing the previous longest chain of March 1991 to March 2001. Notably, per NEBR, the current expansion started in June 2009.
Wall Street is set to end 2019 on a high note with all the three major stock indexes performing impressively. The Dow, the S&P 500 and the Nasdaq Composite rallied 21.7%, 27.9% and 33.9%, respectively. However, the question is whether the U.S. economy will sustain its longest expansion or not?
U.S. Economy on a Stable Footing
Despite lingering trade conflict, the U.S. GDP growth rate did not fall below 2% in the first three quarters of 2019, buoyed by strong consumer spending, which constitutes more than 70% of the economy. Additionally, a solid labor market and gradual wage growth offset the drop in business spending and manufacturing activities.
The earnings growth rate of U.S. corporates has declined in the first three quarters of 2019 and is likely to fall in the fourth quarter also. However, in 2018, corporate profits were high primarily owing to a big tax cut legislation. Importantly, the current consensus estimate indicates an acceleration of earnings growth from 2020 and beyond. (Read More: Previewing the Q4 2019 Earnings Season)
The U.S. manufacturing output jumped 1.1% in November. More important information is that the core durable goods order (which excludes defense aircraft) jumped 1.2% in October, indicating bottoming out of the weakness in business spending.
The National Association of Home Builders’ monthly confidence index increased five points to 76 in December from an upwardly-revised 71 in November. December’s figure represents the highest index reading since June 1999. The IHS Markit Flash U.S. Composite PMI Output Index grew to 52.2 in December from 52 in November. Any reading above 50 reflects improvement in economic activities.
Trade and Fed to Play Major Roles
On Dec 13, both the United States and China declared that they have reached a phase-one trade deal likely to be signed by the two presidents in the first half of January. U.S. Trade Representative Robert Lighthizer said the deal will address intellectual-property disputes along with strong enforcement provisions and financial services and currency issues in addition to tariff rollback and higher agricultural purchase.
The U.S. House or Representative recently approved the USMCA trade deal which will replace the previous NAFTA deal between the United States, Mexico and Canada. Moreover, possibility of Brexit after British prime minister Boris Johnson’s victory in election is likely to open the path for a new trade deal the U.K.
Moreover, reversing its highly hawkish monetary stance of 2019, the Fed adopted a dovish stance since the beginning of this year and reduced the benchmark interest rate by 75 basis points in three tranches. On Dec 12, Fed Chair Jerome Powell reiterated that the central bank is set to maintain a stable monetary policy in 2020 and will contemplate raising rates if inflation surges systematically.
Our Top Picks
A possible trade deal early next year, Fed’s dovish monetary stance and continuity of U.S. economic expansion are likely to pave the way for Wall Street’s rally. At this stage, it will be prudent to invest in those stocks which performed exceptionally well in 2019 and have strong long-term (3-5 years) growth prospect.
However, selection of these stocks can be difficult. Here is where our VGM Score will come in handy. We have narrowed down our search to five stocks with a Zacks Rank #1 (Strong Buy) and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
TopBuild Corp. BLD engaged in the installation and distribution of insulation and other building products to the United States construction industry. It operates in two segments, Installation and Distribution. The company has expected earnings growth of 14.3% for next year. The Zacks Consensus Estimate for next year has improved by 8.3% over the past 60 days. The stock has a long-term EPS growth rate of 28% and has rallied 125.7% year to date.
Lithia Motors Inc. LAD is one of the leading automotive retailers of new and used vehicles and related services in the United States. The company has expected earnings growth of 14.3% for next year. The Zacks Consensus Estimate for next year has improved by 6.4% over the past 60 days. The stock has a long-term EPS growth rate of 9.7% and has jumped 111.1% year to date.
Installed Building Products Inc. IBP engaged in the installation of insulation, waterproofing, fire-stopping, fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving and mirrors, and other products in the United States. The company has expected earnings growth of 14.4% for next year. The Zacks Consensus Estimate for next year has improved by 7.2% over the past 60 days. The stock has a long-term EPS growth rate of 16% and climbed 104.6% year to date.
Hibbett Sports Inc. HIBB is engaged in the retail of athletic-inspired fashion products through its stores. Its stores offer a range of merchandise, including athletic footwear, athletic and fashion apparel, sports equipment, and related accessories. The company has expected earnings growth of 10.2% for next year. The Zacks Consensus Estimate for next year has improved by 20% over the past 60 days. The stock has a long-term EPS growth rate of 12.2% and has soared 93.8% year to date.
SP Plus Corp. SP provides parking management, ground transportation, baggage, and other ancillary services to commercial, hospitality, institutional, municipal and governmental, and aviation clients in the United States, Canada, and Puerto Rico. The company has expected earnings growth of 7.9% for next year. The Zacks Consensus Estimate for next year has improved by 4.5% over the past 60 days. The stock has a long-term EPS growth rate of 10% and has rallied 45% year to date.
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Start Your Access to the New Zacks Top 10 Stocks >>
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Lithia Motors, Inc. (LAD) : Free Stock Analysis Report
Installed Building Products, Inc. (IBP) : Free Stock Analysis Report
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SP Plus Corporation (SP) : Free Stock Analysis Report
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