The current state of affairs in the second quarter of 2020 was a bit of an oxymoron for the Americans — on one hand, the Wall Street recorded the best quarter in more than two decades, while on the other the U.S. economy was hit by the coronavirus-induced recession. Strange as it might appear at the outset, the contrasting characteristics highlighted the vagaries of the market and the turbulent economic conditions that appear to be the ‘new normal’ post the virus outbreak.
Stock Market Rally
After a disappointing first quarter, the equity market performance hit the proverbial ‘Bull’s Eye’ in the second quarter with almost all the leading benchmark indices scripting a huge gain. Despite intense market volatility, the S&P 500 index gained 19.9% in second-quarter 2020 — the best quarterly performance since fourth-quarter 1998 — while the Dow logged a 17.8% rise — the best since first-quarter 1987. The tech-heavy Nasdaq Composite was up 30.6% — the best tally since the fourth quarter of 1999.
The dramatic upsurge was preceded by a lackluster first-quarter performance that witnessed one of the worst starts to a year. While the Dow declined 23.2%, the S&P 500 lost 20% — the worst since third-quarter 2008 — followed by a 14.2% descent by the Nasdaq Composite. The downtrend was primarily triggered by the virus outbreak and the consequent strict lockdown restrictions across the globe as the pause button fueled uncertainty and created a demand-supply imbalance.
What Triggered the Uptrend?
Much of the fancied stock market rally was driven by the monetary and fiscal stimulus by the Fed, which rolled out $2.3 trillion to boost local governments and small and mid-sized businesses. This included the Payroll Protection Program that offered four-year loans to companies of up to 10,000 employees and less than $2.5 billion in revenues for 2019, with principal and interest payments deferred for a year. The interest rates were kept near zero as the Fed continued quantitative easing with purchase of corporate and municipal bonds. Media reports of an additional $1-trillion infrastructure package aimed at improving traditional road and bridge infrastructure along with 5G networks. Rural broadband further buoyed the rally.
With several states gradually reopening their economies, various firms started to bring workers back in their scheme of things after their pandemic-induced furloughs. The U.S. unemployment rate decreased to 13.3% in May as the economy gained 2.5 million jobs. This followed a dismal 20.7-million job loss in April for an unemployment rate of 14.7% as several businesses were shut due to lockdown restrictions. The trend continued in June as well, with the ADP report claiming that about 2.4 million private payrolls were added in the month.
The Flip Side
Despite the encouraging facts, the U.S. economy is technically under a “man-made” recession with the first quarter contracting at an annualized rate of 5%. This puts an end to the longest bull run of the stock market in history. Economists further anticipate a GDP decline of 30% in the second quarter followed by a slow recovery thereafter.
While some economists predict a U-shaped recovery pattern, others expect a V-shaped recovery. High levels of job uncertainty along with ongoing social distancing restrictions to prevent a resurgence of the virus are likely to weigh heavily on household spending in the near future. In addition, firms are broadly expected to cut down sharply on investment plans, after such a huge revenue shock, to preserve dry powder.
4 Stocks to Profit
Amid such a scenario, we have selected four Zacks Rank #1 (Strong Buy) or #2 (Buy) telecom stocks with a VGM Score of A or B. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or #2 offer the best opportunities in the value investing space. In addition, these stocks have a solid Zacks Industry Rank and are placed within the top 50% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Ciena Corporation CIEN: Founded in 1992 and headquartered in Hanover, MD, Ciena is a leading provider of optical networking equipment, software and services. With a long-term growth expectation of 16% and a Zacks Industry Rank #6 (top 2%), this Zacks Rank #2 stock has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. The stock has recorded a gain of 26.4% in the past six months compared with the industry’s rise of 0.1%.
United States Cellular Corporation USM: Based in Chicago, IL, United States Cellular is a leading wireless carrier in the United States in terms of customer count. The company provides a range of wireless products and services, excellent customer support, and a high-quality network to customers with 4.9 million connections in 21 states. With a positive earnings surprise of 104.1%, on average, in the trailing four quarters and a Zacks Industry Rank #67 (top 26%), this Zacks Rank #1 stock has a VGM Score of A. The stock has recorded a gain of 13.7% in the past three months compared with the industry’s rise of 5.7%.
T-Mobile US, Inc. TMUS: Headquartered in Bellevue, WA, T-Mobile is a national wireless service provider, offering mobile voice, messaging, and data services in the postpaid, prepaid, and wholesale markets. With a long-term growth expectation of 18.9% and a Zacks Industry Rank #67 (top 26%), this Zacks Rank #2 stock has a VGM Score of B. The stock has recorded a gain of 32.5% in the past six months against the industry’s fall of 11.1%.
Nokia Corporation NOK: Headquartered in Espoo, Finland, Nokia is a leading communications equipment provider across the globe. With a long-term growth expectation of 15.6% and a Zacks Industry Rank #76 (top 30%), this Zacks Rank #2 stock has a VGM Score of B. The stock has recorded a gain of 13.7% in the past six months against the industry’s fall of 1.3%.
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