After an exponential rise throughout 2017, the U.S. stock markets are witnessing volatility in 2018 so far. Both the major indexes — Dow 30 and S&P 500 — are in the red at present. Stock markets entered correction territory in February due to high inflationary expectations. Following a short resurgence, stocks continued to suffer in March due to President Trump’s tariff policies and the tech stock plunge, which can be attributed to certain company-specific issues.
Moreover, U.S. stock markets plummeted on the first trading day of April. The broad-based market selloff in Apr 1 was the worst start to April since the Great Depression of 1929. However, the markets recovered thereafter primarily on the back of strong expectations from first quarter 2018 earnings results.
Despite an overall decline, a strong bunch of 13 stocks out of the total portfolio of 30 stocks in the Dow has provided positive returns so far this year. Consequently, it would be a prudent move to invest in some of these stocks with favorable Zacks Rank at the moment.
Dow Meltdown: Temporary Phenomenon
U.S. stock markets opened on a positive note in 2018. However, markets took a U-turn in February due to fear of inflation which aggravated in March owing to President Trump’s trade policy.
Subsequently, the blue-chip index shed 4.3% and 3.7% in February and March, respectively. On Mar 19, Dow plunged 335.60 points or, 1.35%, and closed at 24,610.91. This was the point when this closely watched equity market index ventured into the negative territory for the first time this year.
The blue-chip index recovered in April with a gain of 0.4% so far this month. This occurred after trade war fears declined following conciliatory statements from the United States and China. However, on Apr 11, Dow lost 0.9% again as Trump announced his intent to launch a potential military attack on Syria, which is a close ally of Russia.
Notably, the blue-chip index is still down 2.1% year to date. However, a closer look at the index’s composition will portray a different story. In 2017, 21 out of 30 stocks of Dow provided double-digit returns. Year to date, 13 stocks are already in the black while three have provided double-digit returns.
Solid Earnings Momentum
Strong earnings growth potential of major components is likely to aid the blue-chip index return to positive territory in the near-term. Earnings momentum is expected to continue in the first quarter of 2018 buoyed by strong economic fundamentals. Total earnings of the S&P 500 index is expected to be up 16% from the same period last year backed by 7.4% year-over-year growth in revenues. (Read More: Bank Earnings in the Spotlight)
Newly introduced tax reforms and deregulation measures are likely to act as a major catalyst for Q1 earnings momentum. The corporate tax rate was recently lowered from 35% to 21%. Moreover, repatriation of income will be taxed 8% to 15.5%, instead of the current 35%. President Trump has also promised removing 75% of the regulations during his tenure, which is likely to help private employers.
Robust U.S. Economy
On Mar 21, the Fed raised GDP growth forecast for 2018 to 2.7% from 2.5% in December 2017. A survey among economists conducted by The Wall Street Journal predicted U.S. GDP would rise 2.8% in 2018.
Notably, a strong labor market is acting as the major driver of economic growth. The unemployment rate remained at a 17-year low of 4.1% in March, while workers’ hourly wages rose 8 cents, or 0.3%, to $26.82. In the first quarter of 2018, the labor market added 202,000 jobs on an average per month, better than the Q1 of previous two years.
For March, the Conference Board's measure of consumer confidence index stands at 127.7, the second highest since November 2017. Business sentiment also remains healthy. Under Trump’s presidency, the U.S. manufacturing sector is witnessing strong business spending at factories for expensive durable items such as machinery and vehicles.
Stock markets momentum remained largely unhindered despite recent volatility. Steady economic activities and business-friendly policies adopted by the government will pave the way for further stock market growth.
At this stage, we narrowed down our search to five stocks within the Dow Jones Industrial Average, each of which carries a Zacks Rank #2 (Buy). You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Each of these stocks provided strong returns so far this year and has strong growth potential.
The chart below shows the price performance of our five picks year to date.