Though escalation in U.S.-China trade tensions, emerging market meltdown, inflationary pressures and rounds of tech sell-off played spoil sport in the third quarter, the Wall Street has extended its largest bull run. The dual tailwinds of solid corporate earnings and a booming economy are acting as major catalysts. Additionally, higher oil price and slew of upbeat data have bolstered confidence in the economy, leading to risk-on trade.
Below we discuss some of the events that dominated the headlines in the third quarter and influenced the market:
Pot Stocks: The Hot Spot
Like bitcoin in 2017, pot stocks made investors go on a mad rush this year. The enthusiasm is driven by Canada's legalization of recreational marijuana effective Oct 17 that has paved the way for a merger mania, spurring a large number of deal activities and waves of weed stocks IPO.
Canadian cannabis producer Tilray TLRY , which debuted on Nasdaq in July at $17, has grabbed most of the attention in September following the approval from the US Drug Enforcement Administration to import a cannabinoid study drug into the United States. The stock has surged more than 700% since its debut.
A number of alcoholic beverage companies are showing interest in partnering with cannabis producers, the latest being Coca-Cola KO , which is in talks with Canada's Aurora Cannabis to develop cannabidiol infused beverages. Diageo DEO is also in talks with three Canadian pot producers for buying a stake or forming a partnership to produce cannabis-infused beverages. Constellation Brands STZ recently invested $3.8 billion to increase its stake to 38% in Canopy Growth CGC in the biggest marijuana industry deal so far. Notably, Canopy Growth made its debut on the NYSE in May and is up about 76% since then.
Molson Coors TAP is also entering into a joint venture with Hydropothecary to develop marijuana drinks in Canada while Heineken HEINY -owned Lagunitas launched a THC-infused sparkling water in California dispensaries on Jul 30.
Fed Raises Rates for the Third Time
As expected, the Fed has raised interest rates again in September, making it the third hike of 2018 and the eighth hike since December 2015. The central bank is on track for a fourth rate hike in December, citing strong economy, rising inflation and a strengthening job market. As such, cyclical sectors like financials, consumer discretionary and technology are expected to benefit from a rising rate environment.
Some of the top-ranked stocks from these spaces saw a huge surge in their share price year to date. These include On Deck Capital ONDK , up 27.5%; Guess Inc. GES , up 35.3%; and Unisys Corporation UIS , up 149.1%. The trio has a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of B or better, suggesting their continued outperformance in the months ahead. Further, these stocks are expected to witness solid earnings growth this fiscal (ONDK - 4,200%, GES - 48.57% and UIS - 250%). You can see the complete list of today's Zacks #1 Rank stocks here .
More Tariff Tantrums
President Trump has imposed a new tariff of 10% on $200 billion worth of Chinese goods starting Sep 24. The tariff will be increased to 25% effective Jan 1. In retaliation, China slapped a tariff of 10% on more than 5,000 American products worth $60 billion. The latest move has escalated tensions between the two largest economies of the world.
Trump has further threatened to add third round of tariffs on another $267 billion of Chinese imports. This would raise the total tariff to $517 billion in goods, which would mean levying duties on nearly everything China exports to the United States. The latest tariff comes on top of the $50 billion that is already in place with 25% duty. China has also hit back with tariffs of equivalent amount of U.S. exports.
That said, semiconductor companies, which have large exposure to China, took a huge beating in the third quarter, with Applied Optoelectronics AAOI declining 38.3%. The stock has a Zacks Rank #3 (Hold) and a VGM Score of B.
Market Hits Record High
The S&P 500 touched the major milestone of 2,900 for the first time in history on Aug 28 and the Dow Jones soared to its first record high on Sep 20 since late January. This suggests that the stock market is showing strong complacency, shrugging trade war fears, and the trend is likely to continue. While most of the top-ranked stocks are set to surge, Turtle Beach Corporation HEAR and Denbury Resources Inc. DNR seem lucrative picks. Turtle Beach has gained more than 1000% so far this year and has an estimated earnings growth of 1,004.17% for this fiscal while Denbury is up 179% with an expected earnings growth rate of 242.86%. Both the stocks have a Zacks Rank #2.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportUnisys Corporation (UIS): Free Stock Analysis ReportTurtle Beach Corporation (HEAR): Free Stock Analysis ReportMolson Coors Brewing Company (TAP): Free Stock Analysis ReportHeineken NV (HEINY): Free Stock Analysis ReportConstellation Brands Inc (STZ): Free Stock Analysis ReportDiageo plc (DEO): Free Stock Analysis ReportCoca-Cola Company (The) (KO): Free Stock Analysis ReportApplied Optoelectronics, Inc. (AAOI): Free Stock Analysis ReportOn Deck Capital, Inc. (ONDK): Free Stock Analysis ReportDenbury Resources Inc. (DNR): Free Stock Analysis ReportGuess?, Inc. (GES): Free Stock Analysis ReportTilray, Inc. (TLRY): Free Stock Analysis ReportCanopy Growth Corporation (CGC): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research