4 Reasons for Wall Street to Stay Bullish Amid Recent Turmoil
Wall Street's more than five-month-long bull run has suffered a severe setback in September. Month to date, all the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — are down 2.7%, 5.2% and 8.3%, respectively. Notably, these three indexes have ended in negative territory for the first three weeks of September. This has happened for the first time in 2020.
Stock markets recent turmoil has prompted a section of economists and financial experts to warn of more downslide going forward. They cited uncertainty regarding more fiscal stimulus, conflicting news on the availability of a coronavirus vaccine, mounting tech war between the United States and China and the upcoming U.S. presidential election as the sources of volatility. In contrast, we will discuss four reasons for Wall Street to remain north bound, overcoming the recent mayhem.
Economy is Growing Without Fresh Stimulus
Several economists have pointed out that the pace in which the U.S. economy recovered during the May - July period dwindled in August. Slow growth in job data, retail sales data and housing market data are all examples. However, the vital point here is that the economy is still growing, albeit at a slow pace, despite the lack of the second trench of fiscal stimulus when there is persistence of coronavirus-led woes.
Notably, the first round of fiscal stimulus which included $600 per week per individual of unemployment benefit and a massive paycheck protection aid to small businesses, ended in July. Despite this, retail sales climbed 2.6% year over year in August to $537.5 billion, which put the metric back on its pre-pandemic trajectory.
Moreover, not all industries lost momentum. U.S. manufacturing, which suffered a huge blow last year thanks to the trade tussle with China, has expanded in the last three months. Vehicle sales remained robust for the last three months and the preliminary data for consumer sentiment for September by the Michigan University increased by 4.8 points from last month.
Fed's Ultra-Dovish Monetary Stance
On Sep 16, in his lecture after the conclusion of the 2-day FOMC meeting, Fed Chairman Jerome Powell reiterated that the benchmark interest rate will stay zero or near zero at least up to 2023. The central bank will pursue its ultra-dovish monetary stance until the labor market returns to the “maximum employment” level and inflation reached the Fed's target rate of 2% or moderately exceed 2% for some time.
The Fed will also pursue its existing $120 billion monthly purchase of assets in the form of U.S. Treasury and mortgage bonds until the economy returns to normalcy or the pre-pandemic level.
The Fed's ultra-dovish monetary stance is a long-term positive for the stock market. A low-interest rate will reduce the cost of capital for businesses and consumers have a lesser propensity to save due to a low deposit rate.
Therefore, higher spending by businesses and consumers is likely to boost the overall economy and raise stock prices. Moreover, a low discount rate will increase the net present value of the investment in equities.
IPO and M&A Activities Flourish
Last week was the busiest for the U.S. initial public offering (IPO) market witnessed the busiest week last week since May 2019. Notably, 12 IPOs raised around $7 billion from the market.
These companies are looking to take advantage of the astonishing recovery of the U.S. capital market, defying coronavirus-induced devastations. A massive surge in IPO is indicating ample investor appetite for new stocks and growing confidence for risky assets like equities.
Globally, the merger and acquisition activities have heightened in September. Per Bloomberg, around $146 billion of M&A deals have been signed in September, up 51% year over year.
If this trend continues, September may become the best deal-making month since November 2019. The majority of the acquirers are large U.S. businesses. An impressive performance of Wall Street and stable fundamentals of the U.S. economy are the major drivers of strong M&A deals.
Future Looks Promising
In its latest projection on Sep 17, the Atlanta Fed estimated 32% growth for third-quarter U.S. GDP after it plunged 31.7% in the second quarter. On Sep 11, Goldman Sachs predicted a 35% growth of the U.S. GDP for the third quarter. Furthermore, projections for U.S. corporate earnings for third-quarter and full-year 2020 are rising since early July, indicating growing corporate profits.
The earnings trend is likely to improve going forward as large parts of the U.S. economy have started coming out of the pandemic-driven lockdown. After a resurgence of coronavirus infections, it seems that new COVID-19 cases have stabilized in the United States.
The reopening of the economy will limit the stock market's downside potential irrespective of the fact that recent fluctuations may persist for a few more days. Congressional sanction of a new fiscal stimulus will further boost market participant's confidence.
How to Invest
At this stage, it will be prudent to invest in large-cap (market capital > $100 billion) stocks with a favorable Zacks Rank that have suffered a sharp decline in September. These companies have well-established businesses, robust liquidity and brand names along with strong long-term (3-5 year) growth potential. Currently these stocks are available at a lucrative discount.
Major stocks that fall in this category include Apple Inc. AAPL, salesforce.com inc. CRM, Texas Instruments Inc. TXN, Walmart Inc. WMT, QUALCOMM Inc. QCOM, Lowe's Companies Inc. LOW and Costco Wholesale Corp. COST. Each of our picks carries 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 the price performance of above-mentioned stocks in September.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.