The Prudent Speculator Weekly Commentary is expertly curated every week as a valuable resource for stock market news, investing tips, business insights, and economic trends as it relates to value stock investing. In this week’s market commentary, we discuss the Federal Reserve Meeting, Volatility an Economic Update and more. We also include a short preview of our specific stock picks for the week; the entire list is available only to our community of loyal subscribers.
Week in Review – Awful Start to August
Volatility – Not Unusual – 38 Corrections of 10% or Greater Since 1977
Fed Meeting – No Drop in the Fed Funds Rate Yet; Economy Expanding at a Solid Pace; September Cut on the Table
Econ Update – Weaker-than-Expected Numbers
Reason & Evaluation #1 – ISM PMI Still Equates to Real GDP Growth; Low PMIs an Equity Buy Signal
Reason & Evaluation #2 – Recession Not Likely; Even if a Contraction was on the Horizon, Folks Should Stick with Value & Dividend Payers
Reason & Evaluation #3 – Markedly Lower Interest Rates Increase the Appeal of Equities
Reason & Evaluation #4 – Corporate Profit Growth Outlook Remains Favorable
Reason & Evaluation #5 – Ups and Downs; But Equities Have Proved Rewarding Over Time
Stock News – Updates on PHG, MRK, PYPL, GLW, MSFT, BHE, QCOM, LRCX, GT, MRNA, CMI, INTC, FDP, CIVI, PRU & AAPL
Week in Review – Awful Start to August
After a terrific month of July, where the proverbial soldiers finally joined the generals in the 2024 rally with sizable gains for small cap stocks, the first two days of August provided a vivid reminder that equity prices can move in both directions. Indeed, the average stock in the Russell 3000 index skidded 6.0% on Thursday/Friday alone and the S&P 500 extended its decline from recent highs to nearly 6%.
Volatility – Not Unusual – 38 Corrections of 10% or Greater Since 1977
Given that it is said that stocks take an escalator up and an elevator down, we realize that downside market movements can be disconcerting, so we always like to channel Vannevar Bush who said, “Fear cannot be banished, but it can be calm and without panic; it can be mitigated by reason and evaluation.”
Reason and evaluation in mind, we offer the reminder that volatility is hardly unusual as dips even greater than the latest have occurred with surprising frequency. Indeed, 38 times since the launch of The Prudent Speculator in 1977, the S&P 500 has endured a correction of 10% or more.
Of course, there also have been numerous periods with substantial advances of far greater magnitude than the declines. As a result, stocks, led by Value, have delivered terrific long-term rewards, even with 5% pullbacks happening three times per year on average, pushing average annualized returns into the double-digit percentages over the past 47 years.
No doubt, it would be nice to avoid the trips south and only take part in the northbound journeys, but numbers on investor returns compiled by DALBAR show that the average mutual fund holder in stocks and bonds has a knack for zigging when they should have zagged and vice versa. Indeed, there is a reason that Peter Lynch said, “Far more money has been lost by investors trying to anticipate corrections than has been lost in the corrections themselves!”
History shows that the only problem with market timing is getting the timing right, and the mood of traders seemingly can turn on a dime. For example, stocks were performing OK last week, moving higher on Wednesday when the Federal Open Market Committee announced its decision on interest rates,
leaving its target for the Fed Funds rate at a range of 5.25% to 5.5%
with Federal Reserve Chair Jerome H. Powell sounding relatively upbeat on the health of the economy and the progress that has been made on inflation in his introductory remarks at his Press Conference,
and stating in the Q&A, “The broad sense of the Committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate. In that, we will be data dependent but not data point dependent, so it will not be a question of responding specifically to one or two data releases. The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market. If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.”
Given that a friendly Federal Reserve that is leaning toward a looser monetary policy historically has been a positive for equities, on average, it seemed logical that stocks would be pleased that a rate cut is imminent.
Econ Update – Weaker-than-Expected Numbers
That enthusiasm evaporated on Thursday morning when weekly first-time filings for unemployment benefits ticked up to 249,000, some 14,000 more than the week prior and above projections of 236,000,
while the Institute for Supply Management’s (ISM) gauge on the state of the factory sector (known as the PMI) fell to a weaker-than-expected reading of 46.8 in July, with the two figures leading to heightened concerns about the strength of the economy.
Despite better-than-forecast economic stats out earlier in the week on job openings,
and worker productivity,
economic worries grew larger on Friday when it was reported that factory orders dipped 3.3% in June,
and the all-important monthly labor report saw “only” 114,000 new jobs created, below estimates of 175,000,
with an unexpected rise in the unemployment rate to 4.3%, mostly due to more folks entering the work force,
and a weaker-than-forecast increase for year-over-year wage growth of 3.6%.
Reason & Evaluation #1 – ISM PMI Still Equates to Real GDP Growth; Low PMIs an Equity Buy Signal
No doubt, fickle traders could decide that the economic glass is now half empty, but continuing with reason and evaluation, we note that ISM states, “The past relationship between the Manufacturing PMI® and the overall economy indicates that the July reading (46.8 percent) corresponds to a change of plus-1.2 percent in real gross domestic product (GDP) on an annualized basis.” Further, prior low-water marks for the PMI have turned out, on average, to be lucrative BUY signals for equities!
Further, the latest estimate as of August 1 (albeit not reflecting Friday’s economic data) for real Q3 GDP growth from the Atlanta Fed clocked in at a healthy 2.5%,
Reason & Evaluation #2 – Recession Not Likely; Even if a Contraction was on the Horizon, Folks Should Stick with Value & Dividend Payers
while the odds or recession, as tabulated by Bloomberg, continued to reside at 30%.
Given that those recession odds had been much higher in 2023, which turned out to be a year of economic expansion and a fantastic period for stocks, economic forecasting is obviously fraught with peril. And even if an economic contraction were to eventually take hold, the historical evidence strongly argues for sticking with stocks, especially given the difficulty of predicting the start and end of the recession and the massive returns enjoyed by Value Stocks and Dividend Payers one-year post-recession, not to mention the solid returns the year prior!
Reason & Evaluation #3 – Markedly Lower Interest Rates Increase the Appeal of Equities
To be sure, we are braced for additional downside market action, and the equity futures are suggesting an ugly opening when trading resumes this week, but we think stocks valuations became much more attractive last week, given the big drop in interest rates,
making metric comparisons more favorable at the index level,
Reason & Evaluation #4 – Corporate Profit Growth Outlook Remains Favorable
and the portfolio level,
especially with overall corporate profits still expected to show solid growth this year and next.
Reason & Evaluation #5 – Ups and Downs; But Equities Have Proved Rewarding Over Time
True, many of the newspaper headlines of late also have not been grand, but such has often been the case, with all prior troubling events overcome in the fullness of time.
Stock News – Updates on sixteen stocks across ten different sectors
