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Markets Book Best Quarterly Gains in 20 Years: 4 Stocks to Buy

Zacks Equity Research

U.S. financial markets may have left their worst days behind. After all, the three major indexes are going strong despite the rapidly increasing new COVID-19 cases in the country over the past few days.

In fact, stocks closed second-quarter 2020 with their best performance in over 20 years on Jun 30. This indicates the underlying strength of the U.S. economy, which, despite jostling the global health disaster, has managed to keep going. At this point, one might find it prudent to consider a few stocks for investment to bank in the gains.

U.S. Stocks Book Best Quarter Since 1987

Jun 30 was an eventful day for the American financial markets. The major indexes – the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite – ended second-quarter 2020 on a great note. The Dow Jones gained 0.9% to settle at 25,812.88, the S&P 500 added 1.5% to close at 3,100.29 and the Nasdaq Composite gained 1.9% to settle at 10,058.77 in the last trading session of June.

Tuesday’s gains marked the best quarterly performance of Dow and S&P 500 in more than two decades, while the tech-laden Nasdaq Composite posted its best quarterly performance since 1999.

With Tuesday’s performance, the three indexes have clearly come a long way from their lows on Mar 23. The Dow Jones, S&P 500 and the Nasdaq Composite gained 16.8%, 20% and 28.2% respectively in second-quarter 2020.

A major reason for the stupendous rally in market indexes since the March lows was the economy reopening across the country. But a string of factors, which comprise monetary and fiscal stimulus from both the Federal Reserve and the government, are the reasons the markets left behind its Mar 23 lows.

Factors That Pushed the Economy Forward

Let’s consider a couple of tailwinds the markets had enjoyed during the second quarter.

First, let’s begin with how the reopening economy from April-end impacted business activity. In the month of May, retail sales jumped as much as 17.7% from the previous month. Clothing and accessories stores witnessed the biggest percentage gain at 188% while sales of sports products, hobby, musical instruments and book stores witnessed an 88.2% rise.

The increase in total retail sales in May followed a 14.7% drop in April, which was the largest monthly decline in nearly 30 of record-keeping, which was after an 8.3% decline in March.

May’s record jump in sales was largely boosted by warm weather, optimism over economic recovery and the excitement of being able to visit brick-and-mortar stores. In addition, a jump in spending on motor vehicles and at restaurants and bars also accounted for more than a little over half of the overall gain in sales.

In fact, other economic data from the month of May are encouraging as well. According to the National Association of Realtors, after two consecutive months of decline, the index of pending home sales rose as much as 44.3% in May as compared with April. The monthly increase was the largest since January 2001.

May was a good month for new job additions as well. Employment in the country rose by 2.5 million while the jobless rate declined to 13.3%, per the Labor Department. May’s job gain was the biggest one-month gain in employment in the country’s history since at least 1939.

Apart from the rise in pending home sales, record retail sales and stunning addition of new jobs in May, one has more positive data to look at. The consumer confidence reported in June was also a great improvement over the previous month. The Conference Board’s Consumer Confidence Index improved from 85.9 in May to 98.1 in June.

Now, let’s consider the Federal Reserve’s steps to bring the economy back on track. On Jun 10, the Fed decided to keep its benchmark rates unchanged and in a range of 0% to 0.25%. The central bank had decided on these rates in mid-March, to fight the public health crisis. The rates are expected to stay at this level for the next two and a half years.

In addition, the central bank had also said that it will keep on raising its bond holdings, targeting Treasury purchases at $80 billion a month and mortgage-backed securities at $40 billion. These measures put a floor beneath the broader economy.

Finally, the government’s various stimulus measures also propped the U.S. economy. From small business loans to stimulus checks for individuals and households, the government’s swift monetary support really helped the U.S. households and the economy.

Powell & Mnuchin Have Mixed Economic Outlook

Coming back to the stock market’s performance on Jun 30, Tuesday’s rally was because of Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Steven Mnuchin’s testimony to the Congress as lawmakers pondered over new stimulus measures.

Through their testimonies, Powell and Mnuchin presented a rather mixed outlook on the economic recovery of the country. The country’s two top economic policymakers appeared together to express their take on the U.S. economy especially after the number of new coronavirus cases reported across the states rose dramatically over the past few days.

This is because this sudden increase in COVID-19 cases has made more than a dozen states go back on their plans to reopen the economy. The lack of business activity which had stalled the majority of small businesses and others during the lockdown could be rampant again, without another round of stimulus measure.

Powell agreed that economic recovery in the United States had begun earlier than anticipated, citing the better-than-expected May employment data and retail sales figures. But he presented an extremely guarded stance, noting that the way forward would largely depend on how the virus evolved.

Mnuchin, however, had a more optimistic outlook. He said that he expected the economy to rebound in the second half of 2020. Mnuchin hinted that the Trump administration was pondering over more support to companies and households since the existent programs are up for expiration.

At present, millions are without a job and most of the stimulus checks for individuals and households, along with small-business loans (approved earlier) have already been distributed. In addition, raise unemployment benefits, which offered an extra $600 a week, expire at July-end.

Mnuchin suggested that “supplemental relief legislation” was under consideration. These would be targeted at those industries that were especially hit hard by the pandemic, with job being in focus, so American households can get the necessary support.

4 Stocks to Buy

We have, therefore, chosen four stocks that are listed on the Dow Jones or the S&P 500. All these stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

D.R. Horton, Inc. DHI is a homebuilding company. D.R. Horton has an expected earnings growth rate of 7.5% for current year. The company, which carries a Zacks Rank #1, belongs to the Zacks Building Products - Home Builders industry. The Zacks Consensus Estimate for the company’s current-year earnings has moved 1.1% north in the past 60 days.

Bristol-Myers Squibb Company BMY is a developer and manufacturer of biopharmaceutical products. Bristol-Myers Squibb has an expected earnings growth rate of 30.9% for current year. The company, which carries a Zacks Rank #2, belongs to the Zacks Large Cap Pharmaceuticals industry. The Zacks Consensus Estimate for the company’s current-year earnings has moved 0.7% north in the past 60 days.

Chevron Corporation CVX has integrated energy, chemicals and petroleum operations around the world. Chevron has an expected earnings growth rate of more than 100% for next year. The company, which carries a Zacks Rank #2, belongs to the Zacks Oil and Gas - Integrated - International industry. The Zacks Consensus Estimate for the company’s current-year earnings has moved more than 100% north in the past 60 days.

Darden Restaurants, Inc. DRI is the owner and operator of full-service restaurants in the United States and Canada. Darden Restaurants has an expected earnings growth rate of 85.3% for next year. The company, which carries a Zacks Rank #2, belongs to the Zacks Retail - Restaurants industry. The Zacks Consensus Estimate for the company’s current-year earnings has moved 12.2% north in the past 60 days.

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