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The Fed View & Our Market Strategy

John Blank

To read John Blank's full September Market Strategy Report, please click here.

According to the San Francisco Fed,

“Overall, recent data support our forecast that growth will pick up in the second half of the year. Fiscal drag is likely to fade going forward, and the economy will be helped by rising equity and home prices. We expect real GDP growth to average close to +3.5% over 2014 and 2015.

"We continue to see risks associated with this forecast. Contentious debate in Washington could act as a negative shock, and the lingering effects of tax increases could restrain consumption longer than we are expecting. On the other hand, risks associated with Europe have diminished somewhat.”

Zacks View of Stocks and the Economy

What compels U.S. macro optimism? Simply put, stock market highs have stimulated discretionary purchasing.

In addition, serial strength flowed into the U.S. housing market, and moved deeper into value chains, which included business profits and finance.  We saw U.S. housing contribute to GDP quarter after quarter.  That Achilles heel was put behind us.  Banks, real estate and autos led the way.  But pricing the coming taper has slowed new home sales and refi’s down.  The U.S. housing story may show the Fed moved too quickly on the taper.  History will be the final judge of that.

Is it time to buy in early September?   

Based on recent labor market data and the super-bullish service PMIs, the recent correction should be behind us.  We’re onboard for a further rise in U.S. stocks on an optimistic forward 2014 earnings outlook.  Markets are well past the taper and are pricing further out.  China and Europe are headwinds now.

Zacks Sector/Industry/Company Telescope

Here is the latest from the Zacks Rank world of industries:

(1) In the Consumer world, focus on cyclicals like Autos, Tires, Trucks and the Home Furnishing - Appliance industries within Discretionary spending.  Buying a new car, or car parts and refurbishing a home remain attractive.  Other Consumer Discretionary and Consumer Products - Misc. Staples industries got an upgrade from the last monthly report.  

A few Consumer Staples industries suffer from lowered Zacks Ranks, and have stretched valuations. Stay away from Tobacco, Agri-business and Beverage industries in particular.

Our Pick:  Whirlpool (WHR) a Zacks Rank #1 home appliance maker.

(2) The Finance sector has three very strong industries:  Insurance leads.  The smaller Banks & Thrifts and stock-driven Investment Banking & Brokering got upgrades in September.  Major Banks and Real Estate are at market now.  Broad-based strength across Finance speaks well of a U.S. growth story in place for 2H-13, and of benefits from higher interest rates.

Our Pick: Employer’s Holdings (EIG) a Zacks Rank #1 insurance company that provides worker’s comp and services to select small U.S. businesses.

(3) Within the Health Care sector, Medical Care remains attractive; an upgrade on Obamacare’s coming expansion of individual coverage.  Drugs and Medical Products rest at market weight or just below that.  There is also less upside provided by cash dividends to consider here.  

Our Pick: Wellcare Health (WCG) a Zacks Rank #2 provider of managed care services in Florida, New York, Connecticut, Illinois and Indiana.

(4) The IT sector saw ongoing strength in Semi-conductors, Outsourcing & Data Processing.  This speaks to growing use of small niche devices and components and corporate upgrading.  Both Electronics Hardware and Computer Software PC companies showed up as very unattractive.

(5) The Industrials sector looks halfway to strength, Aerospace & Defense, Business Products and Conglomerates are the highest ranked, in that order.  Three industries stood at market weight.  Six industries were below that.  In transports, Rails and Trucking got in front of Airlines.  Industrial industries exposed to global growth conditions still lag.  Caterpillar (CAT) is a good example.

(6) In the Energy sector, high oil prices make alternatives more attractive.  The Alternate Energy and Coal industries turned up. Now at attractive.
Oil Drilling, E&P, and Pipeline are stacked up at market.  Focus on domestic production in the Bakken and Marcellus shale.  They are worth further investigation. Oil-Integrated suffers from Exxon-Mobil (XOM).

(8) One Materials industry is well above a Market Perform:  Steel.  Global growth worries put a bottom on this sector, as steel makes a turn.

(7) Utilities overall are a poor choice overall, as are all Telco sectors.

To read John Blank's full September Market Strategy Report, please click here.

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