To term the third quarter of 2015 as a bloodbath for stocks would not be too off the mark. The robust gains on the final day of the quarter -- Sep 30 -- were ironic, as third quarter performance happened to be the worst quarter since 2011.
The nosedive in the financial markets was not confined to the US, but markets across the globe faced a thumping at regular intervals. However, a major reason for the global plunge was growth fears emerging out of the second biggest economy, China.
In the third quarter, the Dow, S&P 500 and Nasdaq slumped 7.6%, 7% and 7.4%, respectively. The Dow registered its third-consecutive quarter of losses and S&P 500 slumped for the second straight quarter. Though July saw modest gains, markets were walloped in August with benchmarks losing at least 6.3%. September was not kind either toward investors, leading to the first quarter in 2015 when all three benchmarks ended in the red.
Below we present the performance of the key benchmarks: the Dow Jones Industrial Average, Standard & Poor's 500, Nasdaq Composite Index and the fear-gauge CBOE Volatility Index (VIX)
The Dow was the weakest among fellow benchmarks in July, but its 1.5% loss in September was the least compared to S&P 500 and Nasdaq's losses of 2.7% and 3.4%. Had markets not registered its consolation gains on the final day of the quarter, the losses would have looked even more concerning.
A key factor of the third quarter has been market volatility. Markets witnessed extreme fluctuations and volatility had soared to multi-year high . The CBOE Volatility Index (VIX) proves the year's market volatility. VIX scaled to a high of 40.74 on Aug 24, skyrocketing 45.3%. VIX had dropped to this dangerous range during the 2008 financial crisis and also in Aug 2011 when Congress and President Obama were struggling over the debt-ceiling crisis. After a decline of 27.8% in July, the VIX had shot up nearly 135% in a turbulent August.
VIX's multi-year high coincided with the rout that markets suffered in late August. The Dow had entered correction territory on Aug 21, after declining 10.1% from its record high in May. The blue-chip index witnessed the first correction after 1,326 calendar days.
Combined with the record losses on Aug 24, the S&P 500 also entered the correction territory, while the Dow declined to an 18-month closing low. On Aug 25, the S&P 500 was down 12.4% from its peak. Meanwhile, over 253 S&P 500 stocks had lost over 20% from their peaks, according to S&P Capital IQ.
Among the 10 S&P 500 industry, only Utilities sector finished in the green in third quarter. Its 3-month gain was 2.3%. The biggest loser was the Energy sector and was closely followed by Materials sector. They lost 19.9% and 19%, respectively.
It was not only the US markets that made investors feel the worst financial pain in four years, but the sell off was widespread in the global markets. In fact much of the blame must be put on China growth worries, which intensified global concerns and led to the rout.
The market rout has dragged China's key benchmark down to 3K level now. The Shanghai Composite Index had crossed the 5K level in early June. Looking at the other key economies, Japan's Nikkei has slumped 14.5% in the Jul-Sep period, while FTSE 100 has nosedived over 7% and Germany's DAX plunged 11.7%. Record growth in German exports was hardly a catalyst to counter the negative factors affecting global markets.
China disappointed markets following drop in profits of Chinese industrial companies, lower-than-expected investment and factory output, dismal manufacturing data, significant trade gap and decline in foreign exchange reserves among other dismal reports. Asian Development Bank's (ADB) weak economic outlook for China also dented investor sentiment.
Synopsis of Monthly Performance
Let's find out how the key economic events unfolded on month by month basis.
Markets managed to register gains in July despite weak earnings and international growth concerns. China's equity markets underwent a significant downturn, heightening investor concerns. Meanwhile, oil prices remained southbound, leading to losses for the sector.
GDP Improves but Lags Expectations: According to the "advance" estimate by the Bureau of Economic Analysis, the second quarter GDP increased at an annual rate of 2.3%, short of expectations of 2.7% growth. However, this was more than the revised 0.6% growth in the first quarter.
Unemployment Hits 7+-Year Low: A total of 223,000 jobs were added in June, lower than the consensus estimate of 227,000. The tally was less than May's downwardly revised job number of 254,000. Unemployment rate came in at 5.3% in June, its lowest level in over seven years. The unemployment rate was narrower than the consensus estimate of 5.4%.
Mixed Domestic Data: Both the ISM Manufacturing and Services indexes increased more than expected. PPI increased beyond expectations and the CPI also increased, boosting the annual rate of inflation for the first time this year. Industrial production also increased. Overall, housing data released in July indicated a healthy pace of growth. However, retail sales declined 0.3% in June.
Earnings Fail to Inspire: Growth remained non-existent as companies struggled to beat lowered estimates particularly for revenues, and guidance remained on the negative side. Among key names, Microsoft MSFT reported dismal results while investors were miffed with Apple's AAPL outlook. Caterpillar CAT , 3M MMM and American Express AXP reported disappointing results.
The finance sector was however able to show some strength. Earnings for the likes of JPMorgan JPM and Citigroup C came in above expectations. Intel INTC and Amazon.com AMZN were some other big names which posted optimistic results.
FOMC Policy Statement: The FOMC's two-day policy meeting gave no clear indication on the timing of the first rate hike. Nonetheless, the door for a September rate hike was kept open. However, in a testimony before Congress, Fed chair Janet Yellen said she expects the U.S. economy to strengthen and the central bank to hike interest rates "at some point this year."
Greece Reaches Bailout Deal: After much heartburn for investors, Greece reached an agreement with its lenders on a bailout deal during the middle of July. Among other terms of the agreement, Greece needs to broaden its tax structure and improve long-term sustainability of pension schemes.
China Stocks in Freefall : Chinese government agencies' efforts to curb the selloff were not very successful. The slump in China's equity market plagued investors through July. During a trading day in July, the Shanghai Composite had tanked 8.6%, recording its worst one-day slide since Feb 2007. The China Securities Regulatory Commission (CSRC) said China Securities Finance Corp. will buy more small-cap stocks to stabilize the market. The CSRC vowed to prevent "systematic risks" by purchasing more shares. As the measures failed, the Shanghai Composite slumped 15% over the month of July.
Markets experienced a turbulent month, weighed down by concerns about China and uncertainty over the timing of a rate hike. Benchmarks also closed in the red following the yuan's devaluation. A slump in oil prices also weighed on energy stocks before a rebound in prices late in the month. The Dow recorded its biggest monthly decline in more than five years. The S&P 500 and the Nasdaq registered their steepest monthly losses since May 2012.
GDP Improves, Beats Expectations: According to the second estimate, GDP increased at an annual rate of 3.7%, more than the consensus estimate of an increase by 3.2%. This rise in second quarter GDP was more than the first quarters' increase in real GDP of 0.6%.
Unemployment Rate Flat: The U.S. economy created a total of 215,000 jobs in July. The tally was less than June's upwardly revised job numbers of 231,000. However, the unemployment rate in July remained unchanged from June's seven-year low rate of 5.3%.
Economic Data: Positive economic data in August included factory orders, ISM services index and durable orders and retail sales. Industrial production increased 0.6% in July, the largest increase in eight months. However, ISM Manufacturing Index, construction spending and personal consumption were disappointing. Inflation continued to remain a cause for concern. The housing industry continued to pick up pace, as evident from the numbers released in the month.
Oil Stage a Late-Month Rebound: The oil slide continued for most of the month before staging a dramatic rebound in the last week. Price of WTI crude oil had dropped to $39 a barrel for the first time since Feb 2009. Brent crude oil fell below the $43 mark for the first time since Mar 2009. However in the last week, Brent crude prices posted its largest one day percentage gain since Dec 31, 2008.
Oil prices drew strength after short sellers started buying oil companies, banking on upbeat GDP data. Crude futures logged a monthly gain of 4% in August, settling at $49.20 per barrel - their highest point in almost 6 weeks.
FOMC Minutes & Rate Hike Uncertainty: Minutes of the FOMC meeting held on Jul 28 and 29 revealed that the majority of policymakers "judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point." Separately, several market watchers had opined that a September rate hike was unlikely. Federal Reserve Vice Chairman Stanley Fischer commented that a September rate hike was "pretty strong" before China devalued its currency.
China Devalues Yuan, Spooks Markets: The largest devaluation of the yuan in nearly 20 years triggered a worldwide decline in stocks. All three U.S. benchmarks fell by at least 1%. European stocks also felt the heat. Germany stocks were hit the hardest, with the benchmark DAX 30 falling 2.4%. Also, dismal data aggravated losses for China stocks which weighed on investor sentiment in the U.S. China's main stock index moved into the red for the year, while it plunged almost 38% from its peak in mid-June. The People's Bank of China (PBOC) decided to cut interest rates for the fifth time since November.
Markets experienced another difficult month, weighed down by the familiar concerns surrounding China, oil prices as well as soft domestic economic data. Most domestic economic numbers were a cause for concern except for GDP data and the unemployment rate. While uncertainty about the timing of a rate hike dominated in the first half, eventually the Fed stayed away from hiking rates.
GDP Improves, Unemployment Hits Record Low: According to "third estimate", the economy grew at a pace of 3.9%, higher than the consensus estimate and previously projected growth of 3.7%.
Separately, the U.S. economy created a total of 173,000 jobs in August, less than the consensus estimate of 216,000. This also marked the slowest increase in job creations since March. However, the unemployment rate fell to 5.1% in August, its lowest level since Apr 2008.
Domestic Data Disappoint: The ISM Manufacturing Index, construction spending, factory orders and capacity utilization, industrial production all came in below expectations. Industrial production declined 0.4% instead of expectations of a 0.2% decline. PPI remained flat while CPI moved south. Durable orders contracted by 2%, instead of expectations of a 2.2% fall. Housing data was largely disappointing, indicating uneven growth across regions and rising prices which were deterring homebuyers.
China Keeps Bearish Mood Alive: Chinese government's provided reassurances that it would work toward boosting its sluggish economy. But the flood of poor economic numbers continued. China's fixed-asset investment growth was the weakest in about 15 years. Profits in Chinese industrial companies dropped 8.8% from the year-ago level in August.
Oil Prices Fall Again: Oil prices fell significantly after the Energy Information Administration (EIA) trimmed its WTI crude oil price projections for 2015 and 2016. Meanwhile, Goldman Sachs (GS) analysts lowered their oil price forecast through next year. A 2-week winning streak ended on Sep 11 as prices lost over 3% for the week. Dismal data from China also weighed on prices. WTI prices, based on the front-month contracts, lost 8.4% for the month and were 24% lower for the quarter.
Declines Intensify for Biotech Stocks: Biotech companies were under pressure even before Hillary Clinton made her far reaching comments on the sector. However, the slump intensified after U.S. Democratic presidential hopeful Hillary Clinton said she will lay out a plan to restrict "price gouging" in the specialty drugs market. iShares Nasdaq Biotechnology (IBB) registered a weekly loss of 13.2% for the week ending Sep 25, witnessing its worst weekly performance in seven years.
No Rate Hike : The inconclusiveness regarding the Fed rate hike is what was prominent ahead of the September's FOMC meeting. Eventually, the FOMC cited weak global growth scenario and low inflation rate as the main reasons behind their decision to not hike rates in September. The Fed continues to wait for "further improvement in the labor market" and inflation to "rise to 2% in the medium term." Separately, though the Fed raised its outlook for economic growth for this year, it trimmed projections for 2016 and 2017.
However, Yellen later indicated that the lift-off option is very much on the table later this year. She was also optimistic about the US economy. She added: "Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter."
5 Best Performing Stocks in Q3
Amid the gloom, there are certain top Zacks Rank stocks that have done exceedingly well and negated broader markets' concerns.
I ran a screen on Research Wizard for companies with the following parameters:
- Percentage price change in 3Q15 greater than 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 15%
- Zacks Rank less than or equal to 2: This ascertains stocks that have shown above-average returns over the last 26 years.
- Market Cap greater than or equal to $1 billion
(See the performance of Zacks' portfolios and strategies here: About Zacks Performance. )
Here are the top 5 stocks that made it through this screen:
Avolon Holdings LimitedAVOL provides aircraft leasing and lease management services. Avolon also acts as servicer for third party aircraft owners.
Price Change in 3Q15= 36.3%
P/E = 11.03x
This Year's Estimated Growth = 80.1%
AVOL holds a Zacks Rank #2 (Buy).
JetBlue Airways CorporationJBLU is a passenger carrier. The low-fare, low-cost carrier operates primarily on point-to-point routes. Continuous route expansion, higher codesharing agreement and innovative service launch may continue to act as catalysts for the company.
Price Change in 3Q15= 24.7%
P/E = 13.45x
This Year's Estimated Growth is over 100%
JBLU holds a Zacks Rank #1 (Strong Buy).
Tech Data Corp.TECD is one of the leading wholesale distributors of information technology (IT) products, logistics management and other value-added services.
Price Change in 3Q15= 22.5%
P/E = 11.54x
This Year's Estimated Growth = 15.4%
TECD holds a Zacks Rank #1.
BofI Holding, Inc.BOFI is the holding company for BofI Federal Bank, a consumer and business focused banking product provider via the Internet across the US.
Price Change in 3Q15= 21.1%
P/E = 17.64x
This Year's Estimated Growth = 30.2%
BOFI holds a Zacks Rank #2.
CDW CorporationCDW offers information technology products and services to business, government, education and healthcare customers primarily in the United States and Canada.
Price Change in 3Q15= 20.8%
P/E = 14.61x
This Year's Estimated Growth = 20.6%
CDW holds a Zacks Rank #2.
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.