Markets continued to gain over April on increasing oil prices. Earnings results were mixed in nature with most tech majors reporting largely disappointing numbers. Oil prices continued to increase despite the failure of major oil producing countries to come to an agreement on a production freeze.
The Fed decided not to raise interest rates and provided reassurances that further increases would be gradual in nature. In contrast, the European Central Bank (ECB) and the Bank of Japan refrained from cutting rates. Domestic economic data was mixed in nature with GDP suffering a significant fall in the first quarter.
For the month, the S&P 500 and the Dow advanced 0.5% and 0.3%, respectively, while the Nasdaq declined 1.9%. Energy stocks were the biggest gainer during the month, while tech stocks were the worst laggards. Meanwhile, mixed first quarter earnings results had a negative impact on the markets.
Oil prices posted monthly gains due to a weaker dollar, fall in the U.S. rig count, rise in gasoline consumption and worldwide outages with the WTI crude rising by 24.8% in April. However, disappointing earnings results dragged tech stocks downward for the month.
Further, the minutes on Federal Reserve’s March two-day policy meeting indicated that the Fed officials shared diverse views regarding rate hike chances which also raised concerns over the rate hike course. Economic data was largely mixed in nature.
Oil Prices Rise Despite Lack of Producers’ Agreement
Oil prices rose steadily over the month despite the inability of major oil producing companies to conclude a production freeze agreement. Both the WTI crude and Brent crude rose nearly 8% during the first week of April following encouraging data including decline in crude inventories and falling rig count. During the second week, optimism over the crude production freeze meeting in Doha between both OPEC and non-OPEC members boosted oil prices.
Major oil producing nations failed to come to an agreement in the Doha meeting on April 17 over freezing crude production. One of the key OPEC members, Saudi Arabia was not ready to freeze crude output without Iran’s participation. On the hand, Iran clearly stated that it will raise production until it reaches the level of 4 million barrels per day.
However, this had little impact on crude prices which rose due to supply disruptions. Following an oil workers’ strike in Kuwait oil production for the country fell from almost 3 million barrels per day (bpd) to 1.1 million bpd. Moreover, Nigeria’s pipeline problems reduced output by another 440,000 barrels.
Oil prices posted its third straight weekly gains due to weaker-than-expected rise in U.S. crude inventories, rise in gasoline consumption and worldwide outages. Oil prices increased during the fourth week as well following weaker dollar and fall in gasoline inventories.
Developments concerning the ECB, the Bank of Japan and China were the major international factors impacting markets last month. The ECB refrained from providing further stimulus measures following the steps announced in March.
The Bank of Japan (BOJ) kept its interest rates unchanged and announced no new stimulus measures to control the yen’s movement. Consequently, the yen increased almost 4% against the dollar to 108.12 yen. A stronger yen dragged the Nikkei 225 3.6% lower, which in turn had an adverse impact on global markets.
On April 14, China released encouraging trade data, the first of several indicators which showed that the economy was improving. Exports increased 11.5% in March, registering the first monthly rise in nine months.
Q1 GDP Falls
The “advance” estimate by the Bureau of Economic Analysis showed that the first quarter output of goods and services increased at an annual rate of 0.5%, lower than the consensus estimate of a 0.6% increase. This is the slowest pace at which GDP has increased in the first quarter in two years. First-quarter GDP was also less than the 2015 fourth quarter GDP of 1.4%.
Business investment registered its most dismal performance since the end of the recession of 2008. Meanwhile, consumer spending, considered to be the engine of U.S. GDP, was also grievously affected.
Job Additions Decline, Hourly Earnings Rise
According to the Bureau of Labor Statistics (BLS), the U.S. economy generated a total of 215,000 jobs in March, beating the consensus estimate of 203,000. However, the tally was lower than February’s job number of 245,000. Also, the unemployment rate went up from 4.9% in February to 5% in March.
Further, in contrast to February’s 0.1% decline, the average hourly earnings gained 0.3% in March to $25.39 per hour, in line with the consensus estimate. Average hourly earnings witnessed a 2.5% rise from the year-ago figure.
Mixed Domestic Data
Data released through the month was again mixed in nature. The ISM manufacturing index rose above 50, indicating expansion in activity for the first time in last six months. Both the ISM manufacturing and services indexes increased. Durable orders increased in March after declining in February.
However, other reports indicated a different economic scenario was emerging. Retail sales fell 0.3% while factory orders decreased 1.7% in February. Industrial production registered its sixth decline in seven months. Trade deficit increased to its highest level since last August. The U.S. budget deficit in fiscal 2016’s first half rose nearly 5% from that in fiscal 2015’s first half.
PPI declined for the sixth time in the last eight months. Auto sales and Consumer Confidence Index also declined in March. Personal consumption expenditure price index (PCE) rose 0.1% in March, lower than February’s increase of 0.2%. Core PCE increased 0.1%, in line with the consensus estimate. However, this was lower than February’s increase of 0.2%.
Housing Recovery Slows
April’s housing related indicators revealed that the sector was still growing, albeit at a slower pace. Construction spending decreased 0.5% from January. Housing starts decreased 8.8% in March, reaching its lowest settlement since October. Meanwhile, the National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI) remained flat for the third consecutive month.
New home sales fell by 1.5% in March. However, new home sales for February were revised upward. Pending Home Sales Index experienced its second consecutive monthly increase. Existing home sales increased, coming in above the consensus estimate.
The S&P/Case-Shiller Home Price Index revealed that the 20-City composite index increased in February after remaining flat in both December and January. The index also rose 5.4% year over year.
Tech Earnings Disappoint, Bank Stocks Impress
Tech major posted particularly dismal earnings in April, dragging the broader sector lower. Both earnings and revenues of International Business Machines Corporation (IBM – Analyst Report) registered a year-over-year decline. Further, Microsoft Corporation (MSFT – Analyst Report) reported lower-than-expected earnings results.
However, the biggest disappointment for the sector was Apple Inc.’s (AAPL – Analyst Report) earnings numbers. Both earnings and revenues missed estimates, but the big worry for investors was the decline in iPhone sales. Total iPhone sales came in at 51.2 million units, down 16% from the year-ago figure.
In contrast, financial stocks, particularly banks, posted strong results. Better-than-expected earnings results from JPMorgan Chase & Co. (JPM – Analyst Report) and Wells Fargo & Company (WFC – Analyst Report) boosted the financial sectors and banking stocks. Goldman Sachs Group, Inc. (GS – Analyst Report) also posted impressive numbers.
Among other major stocks, results of Coca-Cola Company (KO – Analyst Report), General Motors Company GM and DuPont’s (DD – Analyst Report) outpaced estimates. On the other hand, Travelers Companies, Inc.’s (TRV – Analyst Report) and 3M Company’s (MMM – Analyst Report) results were disappointing.
The minutes of Federal Reserve’s March two-day policy meeting indicated that the Fed officials shared diverse views regarding rate hike chances. Some Fed officials believed that “a cautious approach to raising rates would be prudent.” They also “noted their concern that raising the target range” this month might “signal a sense of urgency they did not think appropriate.”
However, other Fed policymakers “indicated that an increase in the target range” in the Committee’s April meeting could be appropriate “if the incoming economic data” could reach “their expectations.” They expect inflation rate to rise to 2% “over the medium term,” stronger labor market and “moderate growth in output.”
FOMC Policy Statement
After concluding its two-day policy meeting, the Federal Open Market Committee (FOMC) decided to keep interest flat within the 0.25 and 0.5 percent range, and expected “only gradual increases in the federal funds rate.” The committee said that “labor market conditions have improved” despite slow “growth in economic activity.”
Though data from labor and housing market was encouraging, inflation was “below the 2 percent longer-run objective.” So, the Committee said “the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
4 Star Performers for April
I ran a screen on Research Wizard for companies with the following parameters:
- Percentage price change over the last 4 weeks greater than or equal to 20%
- Forward price-to-earnings ratio (P/E) for the current financial year (F1) less than or equal to 20. This picks out stocks that are good value choices
- Expected earnings growth for the current financial year greater than or equal to 20%
- Zacks Rank less than or equal to 2: This ascertains stocks that have shown above-average returns over the last 26 years.
(See the performance of Zacks’ portfolios and strategies here: About Zacks Performance).
Here are the top 4 stocks that made it through this screen:
Spark Energy, Inc. SPKE is an independent retail energy services company.
Price gain over the last 4 weeks = 43.2%
Expected earnings growth for current year = 85.9%
Spark Energy has a Zacks Rank #1 (Strong Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 14.01x.
Price gain over the last 4 weeks = 39.4%
Expected earnings growth for current year = 63%
Daqo New Energy holds a Zacks Rank #1 and has a P/E (F1) of 7.01x.
Transocean Partners LLC RIGP owns, operates and acquires modern, technologically advanced offshore drilling rigs. The company drills for oil and gas in the United States Gulf of Mexico.
Price gain over the last 4 weeks = 33.4%
Expected earnings growth for current year = 23.1%
Apart from a Zacks Rank #1, Transocean Partners has a P/E (F1) of 6x.
OMNOVA Solutions Inc. (OMN – Snapshot Report) develops, manufactures and markets emulsion polymers, specialty chemicals and decorative and building products for a variety of industrial, commercial and consumer markets.
Price gain over the last 4 weeks = 28.6%
Expected earnings growth for current year = 48.1%
OMNOVA Solutions holds a Zacks Rank #2 (Buy) and it has a P/E (F1) of 13.41x.
Sell in May and Go Away?
There is some debate about whether the old adage about offloading one’s stocks in May still holds true. Earnings have been mixed in nature, with tech majors being the notable disappointments. Meanwhile, economic data has also been mixed with key indicators showing signs of weaknesses.
However, the Fed has reiterated that it will not raise rates further, boosting investor sentiment significantly. Meanwhile, oil prices continue to rise and the dollar is weakening which spells good news for export oriented sectors. This means that it would be wise to remain invested this month. Several factors will continue to push stocks upward though specific sectors such as technology may continue to suffer.
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