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U.S. stocks flourished in the third quarter of 2018, breaking several records in the process. Like July and August, Wall Street maintained its bullish run in September despite the fact that this month is traditionally notorious for not providing positive returns.
Despite lingering trade related concerns especially between the United States and China, Wall Street’s robust performance in the third quarter was fueled by strong earnings results and solid macro-economic data. At this stage, investment in stocks with strong price momentum and a favorable Zacks Rank will be lucrative.
Wall Street Thrives in Q3
All three major stock market indexes — the Dow, S&P 500 and Nasdaq Composite — gained significantly by 9%, 7.2% and 7.1%, respectively, in the third quarter of 2018. For S&P 500, the third quarter of 2018 marked the best since the fourth quarter of 2013. For Nasdaq Composite, it was the best one since the first quarter of 2017. The Dow gained more than 2,100 points during this quarter.
Notably, both the Dow and S&P 500 gained eleven times in the past 12-quarters while Nasdaq Composite recorded its ninth consecutive quarterly gain. Meanwhile, the CBOE VIX — stock markets favorite gauge for volatility — declined more than 19% in the third quarter, its largest since the first quarter of 2016.
Year to date, the Dow, S&P 500 and Nasdaq Composite gained 7%, 9% and 16.6%, respectively. All three indexes posted solid gains in both July and August. In September, the Dow and S&P 500 ended in positive territory while Nasdaq Composite ended in the red.
Robust U.S. Economic Fundamentals
U.S. GDP grew at 4.2% in the second quarter of 2018, marking its highest gain since the third quarter of 2014 and the third-best growth rate since 2008. Unemployment rate remains at 3.9%, its 18-year low.
Average wage rate increased 0.5% in August, the rapidest pace since January. Personal income rose 0.3% in August while personal savings rate remained unchanged at 6.6% from July. The core PCE index (excluding food and energy) in August - Fed’s preferred gauge of inflation measure - remained steady at 2%.
The Conference Board reported that the U.S. consumer confidence index for the month of August jumped to 133.4, marking its highest reading since October 2000. The ISM reported that the U.S. manufacturing index for the month of August was pegged at 61.3, its highest since May 2004.
Healthy Earnings Data
U.S. corporates earned record high profits in the first two quarters of 2018. In the first quarter, total earnings of S&P 500 companies were up 24.7% on 8.7% higher revenues. In the second quarter, total earnings of S&P 500 companies were up 25.2% on 8.7% higher revenues. For the third quarter, total earnings of S&P 500 companies are likely to be up by 17.9% on 7.3% higher revenues. (Read More: Has the Earnings Picture Started Weakening?)
Our Top Picks
Solid macro-economic fundamentals, government’s tax reform and deregulation proposals along with sustained strong earnings performance are major tailwinds for the U.S. stock markets. These factors are unlikely to disappear in the near term.
At this stage, investment in stocks with strong momentum will be lucrative. We have selected five stocks with Zacks Momentum Score of A and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Our research shows that stocks with a Momentum Style Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best opportunities in the Momentum-investing space.
The chart below shows price performance of our five picks in the last one month.