Markets endured another volatile month with benchmarks remaining mixed at the end. Oil prices continued to dominate proceedings, falling through the first half of the month on discouraging data and the lack of consensus among major oil exporting countries on a production cut.

However, prices recovered during the second half as discussions on curbing supply seemed to be progressing in a positive direction. Domestic economic data was mixed in nature, showing signs of improvement toward the second half. However, earnings remained lackluster in nature and weighed on investor sentiment.

February’s Performance

For the month, the S&P 500 and Nasdaq declined 0.4% and 1.2%, respectively. The indexes posted losses for three straight months for the first time since Sep 2011. Meanwhile, Dow increased by 0.3% last month, its highest pace of increase since Nov 2015. Benchmarks ended the month mostly in the red due to volatile movement of oil prices, discouraging quarterly reports and mixed economic data.

Oil prices remained volatile during the month following uncertainty regarding possible production cuts. Moreover, doubt over Fed rate hike prospects and increasing oil loan defaults possibilities weighed on the key U.S. indexes. Lower-than-expected earnings results of major companies impacted the market negatively. However, Dow ended in the green for February due to broad-based reasons. Gains in Apple Inc. (AAPL - Analyst Report) also boosted the blue-chip index.

Some earnings results provided a certain amount of impetus to the markets. Better-than-expected GDP rate growth also boosted investor sentiment. However, a concurrent increase in inflation heightened rate hike fears.

Oil Prices Determine Market Direction

Once again, oil prices were the primary factor determining market movement. Prices declined during the first week of the month as prospects of production cuts by major oil producers declined. OPEC’s unwillingness to enter into any deal with Russia to control the supply glut reduced the possibility of a production cut. Iran is aiming to boost its output after sanctions were lifted and is not immediately ready to participate in any production cut.

Prices continued to fall during the second week due to persistent fears about the global supply glut. Further, Venezuela failed to convince Saudi Arabia to trim oil production levels on Sunday. On Feb 9, members of OPEC failed to come to an agreement regarding production cuts. As sanctions were lifted from Tehran, OPEC’s oil output increased.

As a result, the International Energy Agency (IEA) issued a warning about a further fall in oil prices. The U.S. Energy Information Administration (EIA) also projected that average gasoline prices at pumping stations will decline to $1.98 per gallon in 2016.

On Feb 11, the persistent decline in oil prices fueled investor worries. However, indexes recovered some gains after UAE’s oil minister said members of the OPEC are willing to cooperate to cut oil production. The WTI crude slumped below the $27 level – its lowest in 13 years.

Prices recovered during the second half of the month. Prices increased during the third week after Iran’s Oil Minister indicated that Iran is ready to support Saudi Arabia’s and Russia’s move to hold crude production in line. The oil price rise had a positive impact on energy stocks and eventually on the broad-based market.

During the fourth week, WTI increased 10.6%, witnessing its highest gain since August following a positive outlook by the IEA and OPEC secretary general’s encouraging comments. Lower-than-expected crude inventories data from the EIA, favorable gasoline data and an encouraging statement from Venezuela’s oil minister also boosted the oil price. This had a positive impact on energy stocks and eventually on the broad-based market.

Q4 GDP Revised Upward

As per the “second” estimate by the Bureau of Economic Analysis, the fourth quarter output of goods and services increased at an annual rate of 1%, higher than the consensus estimate of 0.4% growth. Fourth-quarter GDP data was revised upward from the previously estimated 0.7% rise.

The economy expanded in the quarter due to a significant increase in inventories and decrease in imports. Inventories increased $81.7 billion, higher than the prior estimate of $68.6 billion. Separately, while imports fell 0.6% instead of the earlier estimate of a 1.1% increase, exports decreased 2.7% instead of the earlier estimate of a 2.5% fall.

Job Additions, Fall in Unemployment

A mixed job report hurt investor sentiment and raised concerns about a possible Fed rate hike this year. According to the Bureau of Labor Statistics (BLS), the U.S. economy generated a total of 151,000 jobs in January, missing the consensus estimate of 195,000. The tally was also significantly lower than December’s job number of 262,000.

However, the unemployment rate declined from 5% in December to 4.9% in January, the lowest level witnessed since 2008. The jobless rate was also lower than the consensus estimate of 5%.

Moreover, average hourly earnings gained almost 0.5% in January from the previous month’s figure to $25.39 per hour, higher than the consensus estimate of a 0.3% rise. Average hourly earnings witnessed a 2.5% rise from the year-ago figure.

Mixed Domestic Data

Data released through the month was mixed in nature. The ISM manufacturing index remained flat at 48.2% in January, coming in under consensus expectations. The ISM services index declined and factory orders fell more than expected. Construction spending also gained lower than expected. Consumer confidence also declined significantly for the month of February.

However, retail sales gained more than expected in January while December numbers were revised significantly upward. Industrial production also came in much higher than expected.

But the uptick in personal consumption expenditure price index (PCE) was probably the most significant economic event of the month. PCE showed an increase of 1.3% year over year, the highest gain since Oct 2014. The rise in core PCE nearly doubled from December’s increase of 0.7%, which is quite close to the Fed’s target of 2%. This raised possibilities that the Fed may raise interest rates much sooner than expected.

Housing Recovery Slows

Over the month, the housing recovery seemed to be slowing. Construction spending increased at a slower-than-expected pace in December. Housing starts declined 3.8% in January. The S&P/Case-Shiller Home 20-city index remained flat in December.

New home sales fell to their lowest level since October. The National Association of Home Builders (NAHB) homebuilders’ sentiment index fell to its lowest level since May. Pending home sales declined to their lowest level in a year. On the positive side, existing home sales continued to increase in January, touching a six-month high.

Lackluster Earnings Numbers

Lower-than-expected earnings results of Cognizant Technology Solutions Corp. (CTSH - Analyst Report), Yahoo! Inc. (YHOO - Analyst Report) and Exxon Mobil Corp. (XOM - Analyst Report) impacted the market negatively. Additionally, Wal-Mart Stores Inc.’s WMT shares decreased following a discouraging earnings report and poor outlook.

However, strong earnings reports from Aetna Inc. (AET - Analyst Report), Alphabet Inc. GOOGL and Comcast Corp. (CMCSA - Analyst Report) had a positive impact on benchmarks. Moreover, gains from companies like Chesapeake Energy Corp. (CHK - Analyst Report) and salesforce.com, inc. (CHK - Analyst Report) following better-than-expected earnings results pushed market upward.

FOMC Minutes

The minutes of Federal Reserve’s January meeting indicated that Fed officials may wait for an improvement in the U.S. economic outlook and achieve an inflation rate of 2% before deciding on a rate hike.

According to the minutes, Fed policymakers “agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook.” Fed officials thought of "altering their earlier views of the appropriate path for the target range for the federal funds rate."  

Yellen’s Congressional Testimony

In her semiannual testimony before Congress, Fed Chairwoman Janet Yellen indicated that the Fed may not opt for any rate hike immediately. However, she did mention that she “does not expect the FOMC is going to be soon in the situation where it is necessary to cut rates.” She added that the labor market scenario is improving and it won’t be fair to jump to any conclusion about the state of the economy.

Yellen defended the Fed rate hike in December on the second day of her testimony before the Senate Banking Committee. She did not agree with the view that the Fed had adversely impacted the financial markets with its December rate hike. She however added that the Fed is not actually ruling out possibilities of a negative interest rate.

5 Star Performers for February

I ran a screen on Research Wizard for companies with the following parameters:

(Click here to sign up for a free trial to the Research Wizard today):

1. Percentage price change over the last 4 weeks greater than or equal to 15%
2. Forward price-to-earnings ratio (P/E) for the current financial year (F1) less than or equal to 20. This picks out stocks that are good value choices
3. Expected earnings growth for the current financial year greater than or equal to 20%
4. Zacks Rank less than or equal to 2: This ascertains stocks that have shown above-average returns over the last 26 years.

(See the performance of Zacks’ portfolios and strategies here: About Zacks Performance).

Here are the top 5 stocks that made it through this screen:

United Insurance Holdings Corp. (UIHC - Snapshot Report) together with its subsidiaries is a property and casualty insurance company.

Price gain over the last 4 weeks = 22.6%
Expected earnings growth for current year = 26.4%

United Insurance has a Zacks Rank #1 (Strong Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 11.43x.

Kraton Performance Polymers Inc. (UIHC - Snapshot Report) is a leading global producer of engineered polymers and one of the world's largest producers of styrenic block copolymers (SBCs).

Price gain over the last 4 weeks = 21.2%
Expected earnings growth for current year = 31.7%

Kraton Performance Polymers holds a Zacks Rank #1 and has a P/E (F1) of 6.45x.

Hawaiian Holdings Inc. (HA - Snapshot Report) is a holding company of Hawaiian Airlines which is involved in transporting passengers as well as cargo.

Price gain over the last 4 weeks = 21.1%
Expected earnings growth for current year = 50.9%

Apart from a Zacks Rank #1, Hawaiian Holdings has a P/E (F1) of 9.22x.

Gibraltar Industries, Inc. ROCK manufactures and distributes products to the industrial and buildings market.

Price gain over the last 4 weeks = 20%
Expected earnings growth for current year = 20.8%

Gibraltar Industries holds a Zacks Rank #1 and it has a P/E (F1) of 18.77x.

Tyson Foods, Inc. (TSN - Analyst Report) produces, distributes and markets chicken, beef, pork, prepared foods and allied products.

Price gain over the last 4 weeks = 19.2%
Expected earnings growth for current year = 25.2%

Apart from a Zacks Rank #1, Tyson Foods has a P/E (F1) of 16.42x.

What’s Ahead for Stocks in March?

Following heavy losses in January, stocks have moved lower once again in February. However, this has been a relatively easier month for the markets with benchmarks ending mixed. Oil prices have once again determined market movement, but a recovery has been witnessed. This is primarily attributable to efforts being made by major oil exporting nations to cut production.

Meanwhile, earnings reports have also been disappointing, further dampening investor sentiment. Additionally, uncertainty over the possibility of a Fed rate hike following encouraging data on GDP and inflation also weighed on stocks.

Given the central bank has adopted a data dependent approach to decision making, economic reports continue to hold the key to market movements. Of course, positive developments on this front are like a double edged sword. While they will indicate that the economy is in good health, investors may get edgy that such data could trigger a rate hike. Investors will continue to remain apprehensive ahead of the Fed’s March meeting.