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4 Reasons Why Wall Street's V-Shaped Recovery Should Continue

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Wall Street is witnessing a V-shaped recovery this year. The strong rally of the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — till mid-February, a sharp decline of 32-36% by late March owing to coronavirus-induced lockdowns and a fabulous recovery of more than 40% from Mar 23 to Jun 5, clearly indicates the market's sharp revival.

Reopening of the economy and a series of recently released better-than expected economic data, especially payroll data, significantly strengthened investors' confidence in U.S. stocks. Here, we will discuss four reasons why the stock markets astonishing rally has legs.

Growing Expectations of a V-Shaped U.S. Economic Recovery

The U.S. economy has stared reopening in a phased manner since the last week of May. Although, all 50 states have reopened to some extent, the aggregate economy is still way below its pre-lockdown level of activities. Yet, several better-than-expected data have shown fundamental stability in the U.S. economy.

Last month's job additions recorded a historic high 2.5 million and unemployment rate dropped to 13.3% from 14.7% in April, as per the Bureau of Labor Statistics. A section of economists are already expecting a far better showing in June as reopening will be expanded to a large extent.

In addition to job data, growing consumer confidence and higher expectations for next six months, better than-expected ISM manufacturing and services index, and solid increase in housing and vehicle sales clearly showed strong pent-up demand.

Moreover, business activities will increase steadily as more people are visiting restaurants, bars and shopping malls, and companies are opening their stores. Moreover,  freight trucking activities gather pace and airlines will add to their fleet. 

Market's Rally is Broad-Based

Wall Street's recovery from the coronavirus-led mayhem is broad-based. Besides the three large-cap centric stock indexes, the small-cap specific Russell 2000 climbed more than 50% during Mar 18 to Jun 5. Notably, small companies create a significant amount of jobs in the U.S. economy. More than 50% of the newly created jobs in the private sector originate here.

The bond market, which was depressed just a month ago, is now behaving in line with equities. On Jun 5, the yield on 10-year U.S. Treasury Note closed at 0.9% after hitting 0.95% in intraday trading. The yield was around 0.65% just a month ago.

The U.S. dollar index (DXY) settled at 96.70 on Jun 5, declining 1.4% for the week. The index had traded at a more-than-three-year high near 103 in mid-March as investors shifted to safe-haven U.S. dollar owing to major concerns about global economic recession. A cheaper dollar will strengthen U.S. exports. Emerging economies will also benefit  since most of their trades are in U.S. dollar terms.

Furthermore, stabilization of crude oil prices due to stiff production cut by the OPEC+ will be a major boost to the US. economy. Notably, the crude oil industry commands a large part of the domestic economy. U.S. oil producers spend around $130-$140 billion per annum in capital expenditure. The industry also provides a good chunk of high-paying jobs.

Unprecedented Stimulus to Fuel Rally

The U.S. government has injected around $3 trillion in fiscal stimulus into the economy in order to protect it from the coronavirus-induced devastations. The Trump administration's decision to give unemployment insurance and stimulus checks for retirees as well as a massive $800 billion restructuring package to small businesses greatly helped in reviving this space.

Federal Reserve’s balance sheet skyrocketed to $7.21 trillion as of Jun 3 as the central bank poured money into the economy by means of purchasing even the high-yielding junk bonds. Moreover, the benchmark interest rate has been reduced to 0%. All these developments restored a strong credit market and resulted in strong pent-up demand.

Globally U.S. Stock Markets Are the Best 

U.S. stock markets are the best destinations for investors. During the post-recession (2008-2009) era, overall returns of U.S. stocks were nearly four times higher than the rest of the world. The gigantic size of the U.S. economy has given it a clear upper hand over other markets. Technological innovation and superiority has always been a pillar of the country's economic strength.  

Many market guru's remain skeptical about economic data as those are still far below their 2019 levels. However, economic data are historical facts while market's movement depends to a large extent on participants' expectations. A study conducted by TMF Group during Apr 17-23, revealed that out of 300 top U.S. corporate officers, 67% expects economic recovery by this year-end, while nearly 25% anticipates a very strong V-shaped rebound.

How to Pick the Right Stocks

At this stage, several stocks look attractive for future growth. However, a three-pronged picking method will make the task easy. First, select large-cap (market cap more than $100 billion) stocks which have a stable business model and are regular dividend (income stream) payers.

Second, choose stocks with strong growth potential and robust earnings estimates revision in the last 7 to 30 days. Third, each of these stocks should carry either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Five stocks have fulfilled our selection criteria. These are:- namely Apple Inc. (AAPL - Free Report) , NVIDIA Corp. (NVDA - Free Report) , AbbVie Inc. (ABBV - Free Report) , Broadcom Inc. (AVGO - Free Report) , Cisco Systems Inc. (CSCO - Free Report) , Tesla Inc. (TSLA - Free Report) and NextEra Energy Inc. (NEE - Free Report) .

The chart below shows the price performance of above-mentioned seven stocks in the past month.


5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>

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