After a disappointing May, the basic materials sector is witnessing an impressive turnaround in June. This sector suffered last month owing to a host of factors including the U.S.-China trade war, concerns over lower demand from China and higher raw materials costs.
The basic materials sector is made up of companies involved in the discovery, development, and processing of raw materials used in manufacturing and construction including steel, aluminum, chemicals and forestry products. Consequently, these stocks are sensitive to business cycle and likely to thrive when the economy is strong.
The trade conflict with China is persisting with no sign of an immediate resolution. Despite the trade tussle and threat of a global economic slowdown, the sector is flourishing primarily on strong market sentiment courtesy of interest rate cut signal by the Fed and rate reductions made by other central banks.
Basic Materials Sector Rebounds
The Materials Select Sector SPDR (XLB), one of the 11 broad sectors of the benchmark S&P 500 Index, has gained 9.6% so far in June. At present, XLB is the best performing sector of the S&P 500 Index for this month since October 2015, when it registered a rally of 13.5%.
At its current level of 57.78, XLB is well above 50-day and 200-day moving averages of 56.03 and 54.97, respectively. The 50-day and 200-day moving averages are important technical barriers providing short-term and long-term support levels. Moreover, in the past month, XLB has been the best performing sector with a gain of 4.8% despite severe volatility. Year to date, this sector has rallied 14.4%.
High Expectations of Rate Cut
The primary reason for this impressive performance of the basic materials sector is the expectation of interest rate reduction by the Fed. According to CME FedWatch tool, 65% responders were hoping for a rate cut in 2019 on Jun 3.
However, after Powell's speech on Jun 4, in which he hinted at a possible rate cut, more than 90% of the responders are expecting a rate cut by September and 80% foresee a likely second cut by the end of December.
After the release of weak job data for May on Jun 7, market expectations of a Fed rate cut in June rose to 27.5% from 16.7%. Moreover, the market is also predicting a 79% chance of lower Fed rates by July. On Jun 14, the CME FedWatch tool said that 85.3% responders are expecting a rate cut by the Fed in July.
The Fed is yet to commit an interest rate reduction anytime soon. On Jun 4, Jerome Powell said that the central bank is watching current economic developments and will "act as appropriate to sustain the expansion." However, his comments have been considered as a strong signal.
Moreover, recently released tepid economic data like job growth, manufacturing PMI and factory orders as well as subdued inflation have acted as catalysts for investors to consider strong ground for a possible rate cut. This sentiment boosted the basic materials sector.
Out Top Picks Against this backdrop, we have narrowed down our search to five basic materials stocks with strong growth potentials. Each of these stocks sport either a Zacks Rank #1 (Strong Buy) or 2 (Buy). 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.
Materion Corp. MTRN is engaged in the production and supply of high-performance engineered materials in the United States and internationally. The stock sports a Zacks Rank #1. The company has expected earnings growth of 27.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 14.3% over the last 60 days. SSR Mining Inc. SSRM is engaged in the acquisition, exploration, development, and operation of precious metal resource properties in the Americas. The stock sports a Zacks Rank #1. The company has expected earnings growth of 73.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 33.3% over the last 60 days. Axalta Coating Systems Ltd. AXTA manufactures, markets and distributes high performance coatings systems. It operates in two segments, Performance Coatings and Transportation Coatings. The stock flaunts a Zacks Rank #1. The company has expected earnings growth of 34.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 51.9% over the last 60 days. Air Products and Chemicals Inc. APD is a global coatings company engaged in the manufacturing, marketing and distribution of coatings systems. The stock carries a Zacks Rank #2. The company has expected earnings growth of 10.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 60 days. The Scotts Miracle-Gro Co. SMG manufactures, markets, and sells consumer lawn and garden products in the United States and internationally. The stock carries a Zacks Rank #2. The company has expected earnings growth of 16.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.4% over the last 60 days. Today's Best Stocks from Zacks Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%. This outperformance has not just been a recent phenomenon. From 2000 - 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year. See their latest picks free >>
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Click to get this free report Air Products and Chemicals, Inc. (APD): Free Stock Analysis Report Axalta Coating Systems Ltd. (AXTA): Free Stock Analysis Report Materion Corporation (MTRN): Free Stock Analysis Report The Scotts Miracle-Gro Company (SMG): Free Stock Analysis Report Silver Standard Resources Inc. (SSRM): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research