Losing Trades Spring Back To Life In September: Top 5 Picks

As conflicts between the United States and North Korea intensified and tech behemoths saw sharp declines, capital tiptoed back to sectors that have been underperforming this year. Among such sectors is banks, a group that was headed to record the worst year since 2013 even a month ago. With the Federal Reserve likely to sell off bonds at a gradual pace, Treasury yields moved north. This in turn boosted net interest margin, an important profitability metric for the banking sector.

Energy companies are also gaining ground this month as crude-oil futures entered a bull phase as markets are approaching a rebalancing of demand and supply. Among other prominent reversals were small-caps gaining traction. Investors are thrilled that President Trump’s renewed initiative to push for a tax reform could spark a revival in such stocks. Before this month, the Russell 2000 index of small-caps had seen the highest number of short positions since September 2008.

Since these losing trades have sprung back to life this month, investing in the same seems prudent. It has also been a breather for Wall Street strategists as such movements help the bull market scale record highs.

Banks Ride the Wave of Steepening Yield Curve

The KBW’s bank measure has shown better returns this month, climbing more than 4%. That’s a turnaround from the first eight months of this year, when the index trailed the broader markets by more than 7 percentage points. This is welcome news for market bulls who have added $5.3 billion to financial-focused exchange traded funds this year.

The Fed is widely expected to start reducing its massive portfolio of Treasuries and mortgage-backed securities after its two-day policy meeting ended on Sep 20. This will be for the first time ever that the central bank will unwind its crisis-era stimulus program. The bond selloff, in the meanwhile, is pushing the long-term Treasury yields higher.

Additionally, such yields are climbing after U.S. consumer prices accelerated in August. U.S. consumer prices rose 0.4% last month, the highest one-month gain since January. This has pushed the year-over-year increase to 1.9% from 1.7% in July. Since banks lend over the long term and borrow for shorter periods, an increase in the long-term yield is beneficial for them.

Oil is on Fire – Energy Shares Gain

The price of oil has surged more than 20% to trade around $52 a barrel, significantly recovering from its June lows of about $42. Oil prices moved north after major producers said that the global market was on its way toward tallying international demand-and-supply levels. The Organization of the Petroleum Exporting Countries (“OPEC”), Russia and several other producers had trimmed output by 1.8 million barrels per day (bpd) to match demand levels this year, which propelled oil prices nearly 15% in the past three months.

Kuwaiti Oil Minister Essam al-Marzouq, who chaired the recently held meeting in Vienna of the Joint Ministerial Monitoring Committee declared that production curbs were helping bring down global crude inventories to their five-year average, which OPEC has been striving to achieve for quite sometime. While the energy minister from the United Arab Emirates said that the country was complying with OPEC’s supply cuts, Nigeria is also pumping below the output cap as per its oil minister.

Small-Caps Regain Appeal

It has, undoubtedly, been a rough year for small-cap stocks. The Russell 200 index, which tracks small-cap companies, lost 1.4% last month but gained 3.4% this month, beating the large-cap S&P 500’s gain of 1%. In fact, on Sep 25, the index had hit an all-time high of 1,453. Some analysts believe that such a feat was possible due to a general rotation out of large-caps, mostly dominated by technology companies, and into smaller domestic firms.

However, most analysts opine that investors are upbeat about a tax plan that helped $1.8 billion flow into small-caps last week. Trump has promised to cut corporate tax rate from 35% to 15% as the economy has showed signs of progress. Gross domestic product, a broad measure of the goods and services produced in the United States, rose at a seasonally adjusted rate of 3% in the second quarter, supported by solid consumer outlays and pickup in business investments.

Slashed corporate tax rates, in ther meanwhile, are particularly a boon for small-caps. Being predominantly domestic firms, small-caps are less adept at reducing tax bills.

5 Solid Choices

September has seen renewed interest in banks, energy and small-cap stocks that have mostly lagged throughout the year. While no single catalyst is responsible for this uptick, it has somewhat signaled a return of confidence in the U.S. economy.

We have, thus, selected five stocks from such areas that flaunt a Zacks Rank #1 (Strong Buy) and 2 (Buy). These stocks also have a Original post

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Written By: Zacks Investment Research