Markets experienced another difficult month, weighed down by the familiar concerns surrounding China, oil prices and soft domestic economic data. A series of dismal economic reports came out of China spooking investors.

Meanwhile, oil prices continued their downward slide despite fluctuating some days in the month. Most domestic economic numbers were a cause for concern except for GDP data and the unemployment rate. Additionally, uncertainty about the timing of the rate hike continued to weigh on investor sentiment. 

September’s Performance

For the month, the Dow, S&P 500 and Nasdaq slumped 1.5%, 2.6% and 3.4%, respectively. A series of poor economic reports coming out of China dampened investor sentiment. Meanwhile, the Fed’s decision to keep the key rates unchanged during the FOMC meeting this month also weighed on markets.

Moreover, U.S. Democratic presidential hopeful Hillary Clinton’s comments to prevent “price gouging” for specialty drugs had a detrimental impact on biotech stocks in the latter half of the month. Continuing decline in crude had a negative impact on major benchmarks throughout the month.

Meanwhile, better-than-expected second quarter GDP numbers indicated that the US economy is back on track. Other economic reports were largely disappointing. Separately, Volkswagen’s (VLKAY - Snapshot Report) alleged scandal related to vehicle emission tests and a massive decline in Caterpillar Inc.’s (CAT - Analyst Report) shares following job cut announcement dented investor confidence.

Q2 GDP Improves

According to “third estimate” released by the U.S. Department of Commerce, the economy grew at a pace of 3.9%, higher than the consensus estimate and previously projected growth of 3.7%.

This was also significantly higher than first quarter’s sluggish growth rate of 0.6%. According to the report, increasing consumer spending and non-residential investment played major roles in boosting the economy in the second quarter.

Unemployment Rate at Record Low

The U.S. economy created a total of 173,000 jobs in August, less than the consensus estimate of 216,000. This also marked the slowest increase in job creations since March. Bulk of the hiring took place in the healthcare sector. However, oil companies trimmed jobs due to slump in oil prices. Manufacturing sector also cut jobs as a stronger dollar made export oriented goods expensive.

Meanwhile, June and July’s job additions were revised higher. While June’s job additions were revised upward from 231,000 to 245,000. The unemployment rate fell to 5.1% in August, its lowest level since Apr 2008. It was also lower than the consensus estimate of 5.2%. The unemployment rate was within the Fed’s goal of full employment; within the range of 5% to 5.2%.

Disappointing Domestic Data

Other economic reports did not paint an optimistic picture. The ISM Manufacturing Index, construction spending, factory orders and capacity utilization all came in below expectations. Industrial production experienced a larger contraction than was expected, falling by 0.4% instead of expectations of a 0.2% decline.

PPI did not decline as expected, but remained flat while CPI fell. Durable orders contracted by 2%, instead of expectations of a 2.2% fall. Though a year-over-year gain of 0.3% in PCE index – an important indicator of inflation –  indicated that the inflation rate is significantly below the Fed’s target of 2%, a rise of 0.4% in consumer spending in August indicated rising demand. It was also higher than the consensus estimate of 0.3% gain.    

Mixed Data on Housing

Housing data presented a mixed picture, indicating uneven growth across regions and rising prices which were deterring homebuyers. Housing starts declined 3% in August, lower than the consensus estimate of 1,161,000. However, building permits in August rose 3.5% from July.

Pending Home Sales declined 1.4% to 109.4 in August, hitting its lowest reading in last five months. Existing home sales fell 4.8%. However, new home sales increased 5.7% in August.

Additionally, the S&P/Case-Shiller Home Price Index gained 4.7% year on year in July, higher than a gain of 4.5% in June. Both the 10-city index and 20-city index gained 0.6% in July. According to the report, price increase in the western region of the country was higher than that in the eastern region.

Moreover, Homebuilders’ confidence for new single-family homes, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI), rose to 62 in September. The reading has remained above 60 for four straight months

China Fears Spook Markets

Dismal data coming out of China continued to worry investors. China’s official manufacturing purchasing managers index (PMI) fell to its lowest level in three years in August. Meanwhile, China’s nonmanufacturing PMI dropped to 53.4 last month from 53.9 in July.

Weak Chinese trade data raised hopes that further stimulus measures will be announced to boost its fragile economy. The world’s second largest economy saw its exports drop 5.5% in August from a year earlier, while its imports plunged 13.8% from year ago levels.

Chinese government’s provided reassurances that it would work toward boosting its sluggish economy. But the flood of poor economic numbers continued. China's fixed-asset investment growth slowed to 10.9% in the first eight months of 2015. This is the weakest in about 15 years. Factory output increased 6.1% in August from prior year period, below expectations of a 6.4% increase.

Shares of raw material producers tumbled after China’s manufacturing data fell to its lowest level in September since Mar 2009. The preliminary Caixin China Manufacturing Purchasing Managers’ Index declined to 47 in September, lower than last month’s final reading of 47.3.

The latest of this series of disappointing reports is a fall in profits of industrial companies. Profits in Chinese industrial companies dropped 8.8% from the year-ago level in August. The Asian Development Bank (ADB) has trimmed China’s economic growth forecast for 2015 to 6.8% from an earlier projection of 7.2%.

Oil Slump Continues

Oil prices resumed their decline this month. On the very first day of September, prices snapped an impressive three-day rally of more than 27% following weak Chinese manufacturing data.  

Oil prices fell significantly after the Energy Information Administration (EIA) trimmed its WTI crude oil price projections for 2015 and 2016. Meanwhile, Goldman Sachs (GS) analysts lowered their oil price forecast through next year. A 2-week winning streak ended on Sep 11 as prices lost over 3% for the week. Dismal data from China also weighed on prices.

Prices rebounded on Sep 15 after the EIA forecasted that production in some of the major shale-oil fields may decline 80,000 barrels per day within October. However, the Fed’s decision on interest rates also had a negative impact on oil prices on Sep 18. Prices rebounded on Sep 21 on bets that global crude production will decline in future.

However, the overall downtrend continued with prices falling on Sep 23 after a rise in oil prices was offset by large buildup in U.S. gasoline stocks. WTI prices, based on the front-month contracts, lost 8.4% for the month and were 24% lower for the quarter. Year to date, they’re down by more than 15%.

Biotech Stocks Tumble

Shares of biotech companies were slipping even before Hillary Clinton made her far reaching comments on the sector. Shares of healthcare companies fell sharply on Sep 21 after U.S. Democratic presidential hopeful Hillary Clinton said she will lay out a plan to restrict “price gouging” in the specialty drugs market.

Her announcement came in after she came across an article about a drug whose price was raised from $13.50 a tablet to $750.Hillary Clinton said that she will lay out a plan to restrict the price of prescription drugs to $250 a month.

Another massive sell-off in this sector dragged down iShares Nasdaq Biotechnology (IBB) by 4.9%. Moreover, the index registered a weekly loss of 13.2%, experiencing its worst weekly performance in seven years.

Biotech stocks continued as Democratic lawmakers made a push for a subpoena to force the company to turn over documents relating to “massive price increases” for two heart drugs it produces. Biotech stocks rebounded strongly on the last day of the month. The iShares Nasdaq Biotechnology (IBB) jumped 4.8%

FOMC Policy Statement

After concluding its two-day policy meeting, Fed decided to keep the short-term interest rate unchanged at near zero level. Sluggish global economic growth, increase in volatility in financial markets and low inflation level held the Fed back from hiking rates.

The Fed continues to wait for “further improvement in the labor market” and inflation to “rise to 2% in the medium term.” The Federal Open Market Committee (FOMC) said: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term."

Though the Fed raised its outlook for economic growth for this year, it trimmed projections for 2016 and 2017. Meanwhile, it also said the unemployment rate will decline to 4.8% by next year and expects it to remain that low for nearly three years. The Fed also said that the inflation rate will reach the 2% target rate at a sluggish pace as headwinds including slow growth in import prices and low oil prices are likely to restrict inflation rate from hitting the target.

Fed Chair’s Comments on Rate Hike

Following the policy statement, the Fed chairwoman Janet Yellen had stated: “In light of the heightened uncertainties abroad and the slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence.”

However, Yellen indicated that the lift-off option is very much on the table later this year. She was also optimistic about the US economy. She said that FOMC members "expect that the various headwinds to economic growth ... will continue to fade, thereby boosting the economy's underlying strength."

She added: "Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter."

TransAct Technologies Inc. (TACT - Snapshot Report) designs, develops, manufactures and markets transaction-based printers and related products.

Price gain over the last 4 weeks = 19.1%

Apart from a Zacks Rank #2 (Buy),TransAct Technologies has a P/E (F1) of 17.42x. Expected earnings growth for the current year is more than 100%.  

Jabil Circuit Inc. (JBL - Analyst Report) is one of the largest global providers of electronic manufacturing services (EMS).

Price gain over the last 4 weeks = 18%
Expected earnings growth for current year = 29.7%

Jabil Circuit holds a Zacks Rank #1 (Strong Buy). The stock’s forward price-to-earnings ratio (P/E) for the current financial year (F1) is 9.85.

JetBlue Airways Corporation (JBLU - Analyst Report) is a passenger airline that focuses on providing high-quality customer service.

Price gain over the last 4 weeks = 13.9%

Apart from a Zacks Rank #1 (Strong Buy), JetBlue has a P/E (F1) of 13.76x. Expected earnings growth for the current year is more than 100%.  

BofI Holding, Inc. (BOFI - Snapshot Report) is the holding company for BofI Federal Bank, a consumer-focused, nationwide savings bank operating primarily through the Internet.

Price gain over the last 4 weeks = 13.4%
Expected earnings growth for current year = 30.2%

BofI Holding holds a Zacks Rank #2 (Buy) and it has a P/E (F1) of 18.29x.

Universal Insurance Holdings Inc. (UVE - Snapshot Report) offers a wide range of property and casualty insurance products via its subsidiary companies.

Price gain over the last 4 weeks = 12.6%
Expected earnings growth for current year = 23.1%

Apart from a Zacks Rank #1 (Strong Buy),Universal Insurance has a P/E (F1) of 11.54x.

Will Stocks Bounce Bank in October?

Concerns about China’s weak economic situation and the downward slide in oil continued to haunt investors in September. Fears about the domestic economy added to markets’ concerns. Meanwhile, the sudden plunge in biotech stocks has also had a considerable impact on stocks. If Wednesday’s rebound continues, this is one burden investors would be glad to be rid of.

Going forward, strong domestic economic data would be required to boost markets. This will also help a “data dependent” Fed make up its mind about a rate hike. The Fed Chair remains confident about a hike in December and this will continue to play on investors’ minds. Domestic economic data could largely determine the fate of stocks in the days ahead.

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