Economic News, Interest Rates, AAII Sentiment and More

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 Economic News, Interest Rates, AAII Sentiment 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.

Executive Summary

Newsletter Portfolio Trades – Sold FL, Trimmed DE, Bought DKS

Sentiment – More Bulls than Bears

Week – Tariff Talk & Debt Worries Send Stocks Lower

Interest Rates – Stocks Have Performed Well, On Average, No Matter the Direction of Long-Term Government Bonds

Valuations – Attractive Metrics on our Portfolios

Historical Perspective – Plenty of Scary Events and Volatility, but Long-Term Trend is Up

Econ News – Mixed Numbers but Growth Still the Forecast

Recessions – History Shows Staying the Course the Right Move Even if a Contraction Were to Occur

Stock News – Comments on seven different stocks across six different sectors

Sentiment – More Bulls than Bears

After 15 straight weeks of more pessimists than optimists, with levels of Bearishness during the timespan as great as was seen when the global economy shut down during the COVID-19 Pandemic and during the Great Financial Crisis in 2009/2009,

the latest weekly Sentiment Survey from the American Association of Individual Investors (AAII) showed more Bull than Bears, just in time for the equity markets to suffer a sizable retreat last week with the average stock in the Russell 3000 index dropping 3.47%.

Of course, the historical evidence shows that investors should be greedy when others are fearful BUT they should just be a bit less greedy and not fearful when others are greedy.

Week – Tariff Talk & Debt Worries Send Stocks Lower

To be sure, most are blaming last week’s pullback on more tough tariff talk, from President Trump, including the threat of a straight 50% levy on the European Union starting June 1 and a duty of at least 25% on iPhones not manufactured in the United States,

though stocks persevered and went on to all-time highs in the fullness of time following the Trump 45 Trade War that was initiated on March 2, 2018,

while tariffs have long been part of the investment landscape.

We respect that many will also cast blame on the fallout from the Moody’s downgrade a week ago of the U.S. credit rating, even as that ratings agency was 14 years late in joining Standard & Poor’s and two years delayed in matching Fitch with similar moves. Further, one would be hard-pressed to find those events on the long-term chart of returns for stocks, and whether or not the credit agencies rate American debt at the highest rung, it is hard to argue with Jamie Dimon. The JPMorgan Chase CEO said back in August 2023, following the Fitch downgrade, “The U.S. has the best financial system in the world.”

Interest Rates – Stocks Have Performed Well, On Average, No Matter the Direction of Long-Term Government Bonds

That does not mean that U.S. government bonds are immune to volatility, as the yield on the 30-Year U.S. Treasury climbed above the psychologically important 5.0% level last week,

but the long-term data reveals that stocks have performed fine, on average, on both a concurrent-with and subsequent-to basis whether the yield on long-term Treasuries is rising or falling,

and the betting odds in the Fed Funds futures market are still calling for close to 2 cuts of 25 basis points each from Jerome H. Powell & Co. before the end of the year, with more than 3 cuts expected over the next 12 months.

Valuations – Attractive Metrics on our Portfolios

True, tariffs and higher interest rates arguably should be headwinds for stocks, and the aforementioned Mr. Dimon said last week, “I think earnings estimates will come down, which means P/E will come down.” We understand what he meant, though mathematically speaking, lowering the E in the equation will raise the P/E unless stock prices fall significantly, but analysts are far less pessimistic in their recent outlooks,

though we think valuation metrics are a reason to gravitate toward inexpensively priced stocks, like those that we have long championed, as the Russell 3000 Value index remains reasonably priced on an earnings yield basis,

while our broadly diversified portfolios of what we believe are undervalued stocks boast even better valuation metrics. Indeed, the trailing-12-month earnings yield (the inverse of the 16.0 P/E ratio) for TPS Portfolio is 6.25% and the dividend yield is 2.5%.

Historical Perspective – Plenty of Scary Events and Volatility, but Long-Term Trend is Up

Obviously, the near term is uncertain, but stocks have always moved higher over time as they have overcome plenty of disconcerting events,

to turn in fantastic long-term returns of 9% to 13% per annum,

despite numerous trips south along the way, including 39 corrections of 10% or more since the launch of The Prudent Speculator in 1977,

and 27 “official” Bear Markets over the last 97-plus years,

with this year’s intraday 20% peak-to-trough loss not even part of that tally.

Econ News – Mixed Numbers but Growth Still the Forecast

Yes, the health of the economy is a major wildcard, even as last week we learned that the preliminary readings from S&P Global for May on the health of the U.S. services sector,

and the manufacturing sector both came in above consensus expectations,

as did new home sales for April at a seasonally adjusted annual rate of 743,000.

Existing home sales for April were weaker than forecast, coming in at 4.0 million, versus projections of 4.1 million,

but first-time filings for unemployment benefits of 227,000 were lower than forecast and they continue to reside at multi-generational lows,

Recessions – History Shows Staying the Course the Right Move Even if a Contraction Were to Occur

That GDP growth projection is down from 2.8% last year, but it is a long way from a recession, which heretofore have been modestly negative, on average, for equities during the actual contraction. Of course, knowing when the recession begins and ends is not knowable in advance and one would not want to miss out on solid gains pre-contraction,

and especially post-recession, where the average one-year return for Value stocks has been 41.3%!

We must be braced for additional downside action, but we can’t argue with three pieces of wisdom offered six weeks ago by none other than Jim Cramer. Nobody Ever Made A Dime Panicking. The President Likes Drama – You Won’t Get Certainty. Staying The Course In The Markets Is Always The Winning Strategy.

Stock News – Updates on seven stocks across six different sectors

Keeping in mind that all stocks are rated as a “Buy” until such time as they are a “Sell,” a listing of all current recommendations is available for download via the following link: https://theprudentspeculator.com/dashboard/. We also offer the reminder that any sales we make for our newsletter strategies are announced via our Sales Alerts. Jason Clark, Chris Quigley and Zack Tart take a look at earnings reports and other market-moving news of note out last week for more than a few of our recommendations.