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Strong Dollar Shifts the Playing Field - Analyst Blog

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The following is an excerpt from John Blank's full April Market Strategy report. To access the full PDF, please click here .

Spring Comes In Like a Lamb

Winter job adds morphed to March jobs weakness -- on strong dollar sensitive goods producers. The S&P 500 looks fully valued at 2100 to me.

The U.S. added +239K jobs in January and 295K jobs in February. APD said 189K in March, with just 5K in goods jobs in the total. When a U.S. producer invoices in U.S. dollars, that price looks a whole lot more expensive outside the U.S. now.

U.S. GDP Growth Moderates

The San Francisco Federal Reserve expects first quarter of 2015 GDP growth to be pushed up by strong consumer spending but pushed down by declining net exports.

Recent severe weather hit the Midwest and East Coast. It likely reduced GDP growth by a few tenths. Some bounce-back is expected in the second quarter.

The San Fran Fed projects above-trend economic growth for the rest of 2015 and the first half of 2016, fueled primarily by continued low interest rates and strong consumer spending, with the latter attributable to improved labor market conditions and lower gasoline prices.

After the middle of this year, we expect a gradual decline toward our long-run trend growth rate of around 2% as interest rates start to rise, the boost from lower gas prices fades, and the negative effects of the stronger dollar persist into 2017.

Consider the U.S. Dollar and Oil

Dramatic recent movements in oil prices and the value of the dollar heavily influenced the outlooks for both economic growth and inflation.

One way to see the negative effects of the dollar appreciation and lower net exports is to compare the recent economic fortunes of export-intensive states with other states.

The 10 states with the highest export shares show no change in average unemployment from June to December 2014. By comparison, for all other states the average unemployment rate fell by half a percentage point over the same period.

Zacks Sector/Industry/Company Telescope

Early April saw a significant change in the Zacks Industry Rank landscape. Energy rose off the mat. Refiners actually put the Oil-Misc. up as the most attractive industry overall. That's significant. The IT sector lead again, but semiconductors took a big downgrade to Market Weight.

In Industrial land, Business Services improved, but Metals, Metal Fabricating, Machinery and Electrical Machinery are in the tank. The strong dollar and weak oil price clearly hurts the cap-ex spending on heavy items. A similar pattern emerged within Materials. Paper and Containers & Glass upgraded. Steel at the bottom.

(1) Info Tech is a Very Attractive sector. The best plays are found in Computer-Office Equipment and Misc. Tech now. Semiconductors fell back to a Market Weight in March.

Company to Look at: Zacks #1 Rank IGATE Corp. ( IGTE )

IGATE Corporation offers a comprehensive range of Information Technology solutions. Their employees specialize in areas such as offshore outsourcing, enterprise applications and IT staffing, all available via a variety of strategic delivery models.

(2) Health Care is a Market Weight sector. All industries hover around the centerline.

(3) Financials is a Market Weight sector. Nearly all industries hover around the centerline. The sole differentiated industry is the major banks, which are Very Unattractive.

(4) Industrials are a Market Weight sector. There is divergence to note here. Best industries are Aerospace & Defense and Business Services. Stay away from Machinery, Metal Fabricating and Electrical Machinery. The oil price collapse hurts spending on heavy cap-ex.

(5) Materials are a Market Weight sector. There are upgrades to Paper and Containers & Glass. The worst industries are Steel and Metals-non-ferrous.

(6) Telcos upgraded to Market Weight. Utility-Telephone is upgraded to Attractive.

Company to Look at: Zacks #1 Rank Alliance Fiber Optic Products ( AFOP )

Alliance Fiber Optic Products, Inc. designs, manufactures and markets a broad range of high performance fiber optic components and integrated modules. AFOP's products are used by leading and emerging communications equipment manufacturers to deliver optical networking systems to the long-haul, enterprise, metropolitan and last mile access segments of the communications network.

(7) Utilities upgraded to Market Weight. Utilities-Electric Power and Utilities-Gas Distribution were upgraded to Market Weight.

(8) Consumer Discretionary is an Unattractive Sector. The leader at Market Weight is Home Furnishing-Appliance, with low rates carrying on longer. Leisure Services and Media get an upgrade to Market Weight. At the bottom, Autos/Tires/Trucks industry is Very Unattractive.

(9) Energy is Very Unattractive. However, upgrades were seen and there is one very bright spot. Oil-Misc, with its refiners, is now upgraded to Very Attractive. The Oil E&P and Oil & Gas integrated industries got upgraded from their bottoms. There are signs of life stirring here.

Company to Look at: Zacks #1 Rank Phillips 66 ( PSXP )

Phillips 66 Partners L.P is a downstream energy company. It operates in three segments: Refining and Marketing, Midstream and Chemicals. Refining and Marketing segment purchases, refines, markets and transports crude oil and petroleum products primarily in the United States, Europe and Asia.

(10) Consumer Staples is a Very Unattractive Sector. The strong U.S. Dollar is taking a toll on the big multi-nationals here. Food, Tobacco, Soaps & Cosmetics, and Food & Drug Retail are all in the tank now.

This is an excerpt from John Blank's full April Market Strategy report. To access the full PDF, please click here .

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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.

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