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China Turns a Corner: Zacks April Market Strategy

The following is an excerpt from John Blank’s full Market Strategy Report for April. To access the entire PDF, click here.

U.S. Stocks and the Presidential Election Cycle

The USA has a Presidential election in 6 months. At this point in time, polls begin to reflect the likely outcome of actual voting. This month’s U.S. markets summary discusses the implications.

(1) What do insurgency campaigns like those of Donald Trump and Bernie Sanders mean to the election process? Most of all, insurgencies imply this -- new voters are playing a big role on both sides of the aisle.

Trump and Sanders depend on support from anti-establishment types and younger voters. These types tend to turn up less reliably than the party faithful backing Clinton and the more traditional Republicans.

(2) I liked one cogent thesis on this weird election cycle. One perceptive observer wrote: “It has been my contention for the last few years. We are living in an Interregnum.”

The 20th century Italian philosopher Antonio Gramsci defined the Interregnum concept well: "The old is dying and the new cannot be born; in this interregnum many morbid symptoms arise."

(3) Let's bust one myth: namely, Republican presidents are better for stocks. It is not true.

“In election cycles since World War II, the Dow Jones industrials have posted bigger average returns under Democratic presidents” -- Stock Trader's Almanac.

(4) Prepare for a meager U.S. stock bounce after the 2016 election.

In "Presidential Cycle," Ned Davis Research noted the S&P 500 posts its weakest returns in the first year of the four-year election cycle.

Since 1900, stocks have gained –
  • +3.4% on average in the post-election year,
  • +4.0% in the midterm year,
  • +11.3% in the pre-election year, and
  • +9.5% in an election year.

Global Markets Evaluate a Turn in China PMIs

This month, I guide asset allocations outside the USA from a core idea. As I write on April 7th, the latest one-week ‘risk-off’ episode in non-US markets has reversed.  

A profit taking exercise, after a strong 7-week momentum run, ran its course.

Here are 4 reasons why the non-U.S. bull is alive and well--
  • Upside surprises to forward-looking Purchasing Manager Indices (PMIs) came out on Mainland China. An overall state of PMI expansion -- in both services and manufacturing -- bodes well for more than just China.
  • Weird behavior, tied to Japanese stock selling by oil dependent sovereign wealth firms, and hedging, should morph into a state of bottoming and reversal. The bad news is all priced in, and the move is overextended.
  • WTI and Brent oil prices traders are done selling and shorting down towards $35 a barrel. A short-term price bottom would be my call. Consensus still sees $50 a barrel as the 12-month target.
  • The Fed is tied down to no more than 2 rate hikes in 2016, due to the U.S. election, and due to the negative rate policies in Europe and Japan. Lower risk-free rates leave the risk-on bid alive for stocks. Where else can investors go?  Basically the fixed income cupboard is left bare by the world’s dominant monetary authorities.

Don’t read this and think the 4 non-U.S. drivers keep alive a smooth week-after-week rise in non-U.S. stocks.

The bull market should be on for non-U.S. stocks as long as we don’t have oil prices and China fall apart at the same time. But it won’t be smooth sailing all the time.

Zacks Sector/Industry/Company Telescope

Early April shows us stale Zacks Ranks. Analysts have yet to update EPS outlooks. The Q1-2016 earnings season is about to get under way. With a few caveats, I would not place much weight on this month’s sector and industry rankings.

One reliable sector downgrade hit the Financials across the board. This happened due to the lowered outlook for rate hikes. Only REITs came out OK. To the upside, note the surprise rise in Consumer Staples industries.

(1) Consumer Staples was upgraded to Attractive.  This is the sole sector looking better in March. Food & Drug/Retail, Other Misc. Staples, and Soaps & Cosmetics showed marked improvement.

Zacks #2 Rank (Buy) Company: Unilever PLC (UL)

Unilever PLC is engaged in manufacturing of branded and packaged consumer goods, including food, detergents and personal care products.

The Company also has interests in specialty chemicals. Unilever sells its products internationally.
(2) Health Care moved down to Market Weight. It is Drugs, then Medical Products & Medical Care, in that order.
Zacks #2 Rank (Buy) Company: Johnson & Johnson (JNJ)

Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the healthcare field.

The Company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics.
  • Its Consumer segment offers products for use in the baby care, skin care, oral care, wound care, and women's health fields, nutritional and over-the-counter pharmaceutical products.
  • The company's Pharmaceutical segment provides various products in the areas of anti-infective, antipsychotic, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, thrombosis, vaccines, and infectious diseases.
  • Its Medical Devices and Diagnostics segment offers electrophysiology and circulatory disease management products; orthopedic joint reconstruction, spinal care, neurological, and sports medicine products; surgical care, aesthetics, and women's health products.

Johnson & Johnson is based in New Brunswick, New Jersey.
(3) Info Tech moved down to Market Weight.  Misc. Tech led the way again. Electronics looked solid. The Semis fell to Unattractive in front of earnings.

Zacks #2 Rank (Buy) Company: Lenovo Group (LNVGY)
Lenovo is a personal technology company. The Company is dedicated to building PCs and mobile Internet devices.
  • Lenovo's business is built on product innovation, a highly efficient global supply chain and strong strategic execution.
  • Formed by Lenovo Group's acquisition of the former IBM Personal Computing Division, the company develops, manufactures and markets reliable, high quality, secure and easy-to-use technology products and services.
  • Its product lines include legendary Think-branded commercial PCs and Idea-branded consumer PCs, as well as servers, workstations, and a family of mobile Internet devices, including tablets and smart phones.
  • Lenovo has major research centers in Yamato, Japan; Beijing, Shanghai and Shenzhen, China; and Raleigh, North Carolina.

Lenovo Group is based in Quarry Bay, Hong Kong.
(4) Consumer Discretionary fell back from Attractive to Market Weight. Other-Cons. Disc. is best.  Home Furnishing-Appliance is solid.  All remaining discretionary industries did not look attractive, again, in front of earnings.

(5) Utilities fell to Market Weight.
(6) Telcos remained a Market Weight.

(7) Energy got up to a Market Weight. Energy-Alternates and Coal were the bright spots. Integrated got a Market Weight. Oil & Gas Drilling remained in the dumps.

(8) Financials fell to Very Unattractive. The sole Market Weight industry was REITs.  All other industry looked very poor.  The rate outlook downgrade hurt.

(9) Industrials fell to Very Unattractive.  Airlines and Aerospace & Defense held up at a Market Weight.  Railroads appeared to stabilize their EPS outlooks. Machinery and Metal Fabricating looked terrible again.

(10) Materials remained Very Unattractive.  Paper and Chemicals are at the bottom. Steel got better, but is not more than Market Weight yet.

Let’s see where this goes next month!

This is an excerpt from John Blank’s full Market Strategy Report for April. To access the entire PDF, click here.
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