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 an economic update, FOMC meeting, valuations and stock news. 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
Huge Rebound – Ups & Downs are Normal; Stocks Have Persevered Through Plenty of Disconcerting Events
Contraindicator – AAII Sentiment Becomes Super Bearish
Econ Update – Weaker-than-Expected Numbers; Bond Yields Plunge
FOMC Meeting – Fed Leaves Interest Rates Unchanged; Market Betting on No More Hikes
Valuations – Stocks, Especially Value, Reasonably Priced
Stock News – Updates on fourteen stocks across seven different sectors
Huge Rebound – Ups & Downs are Normal; Stocks Have Persevered Through Plenty of Disconcerting Events
Mamma always told us there would be weeks like one just ended as the seasonally favorable Halloween-to-May-Day period,
got underway with a tremendous rebound, with the 5.82% total return for the five trading days representing the 37th best weekly advance in the 43-year-history of the index.
Volatility, both of the positive and negative variety, is a normal part of the long-term-investment equation, as it was just a week ago that the major market averages were mired in a 10% correction. Happily, the trend over time has been markedly higher, with Value Stocks and Dividend Payers leading the returns race over the preceding nine-plus decades.
The challenge, of course, is to keep the faith through thick and thin, something the headlines of late out of the Middle East have made difficult.
Of course, and this is not meant to minimize the human suffering in Gaza, Israel, Ukraine and elsewhere, history is full of disconcerting events through which stocks have managed to persevere,
yet the vast majority of investors fail to enjoy the riches that the financial markets have to offer, as evidenced by the big returns gap calculated by data provider DALBAR between stock (and bond) mutual fund investors and the indexes over the last three decades.
Contraindicator – AAII Sentiment Becomes Super Bearish
Needless to say, the conclusion one can draw from the DALBAR data is that the only problem with market timing is getting the timing right, but the problem for most who try to move into and out of equities is that the big up moves often take place when they are least likely to be comfortable with equities. Such was the case last week when the folks on Main Street, as tabulated by the American Association of Individual Investors (AAII), saw a sizable drop in Bullishness and a big jump in Bearishness, with the Bull-Bear Spread of -26.0,
one of the most negative in history, illustrating once again why this sentiment gauge has long been viewed as a contraindicator.
Econ Update – Weaker-than-Expected Numbers; Bond Yields Plunge
To be sure, one week does not a trend make and there is as yet hardly reason to be of great cheer, given that the average stock in the Russell 3000 index has a minus 0.7% year-to-date total return. Still, we found it interesting that equities managed to catch a bid last week on reports that the October reading on the health of the factory sector from the Institute for Supply Management (ISM) came in much weaker than estimated,
and that fewer jobs than expected were created in the private sector last month, a “disappointing” figure that was confirmed by Friday’s full October employment report in which 150,000 new payrolls were created, below forecasts calling for 180,000.
With the unemployment rate also ticking up to 3.9%,
and the important ISM Service Sector PMI trailing projections,
interest rates plummeted, with the yield on the benchmark 10-Year U.S. Treasury retreating to 4.57% from the prior week’s closing level of 4.83%,
…as market participants decided that the likelihood of additional Federal Reserve rate hikes was reduced as expectations increased that the Fed Funds rate will be cut several times in 2024.
FOMC Meeting – Fed Leaves Interest Rates Unchanged; Market Betting on No More Hikes
And speaking of the Fed, Jerome H. Powell & Co. decided to leave the target for the Fed Funds rate alone at a range of 5.25% to 5.50% at the November FOMC Meeting, with little change in the accompanying statement,
and Chair Powell continuing to talk tough on inflation in his Wednesday Press Conference,
Inflation remains well above our longer-run goal of 2 percent. Total PCE prices rose 3.4 percent over the 12 months ending in September. Excluding the volatile food and energy categories, core PCE prices rose 3.7 percent. Inflation has moderated since the middle of last year, and readings over the summer were quite favorable. But a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. The process of getting inflation sustainably down to 2 percent has a long way to go. Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.
…but also reminding that future tightening (or loosening down the road) in monetary policy will remain data dependent.
In light of the uncertainties and risks, and how far we have come, the Committee is proceeding carefully. We will continue to make our decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation as well as the balance of risks. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
Traders seemed to like the “proceeding carefully” language, with many concluding that the Fed is done with rate hikes for this tightening cycle. We are not so sure, but we note that stocks have performed well, on average, over the years whether the Fed Funds rate is moving up or down,
while the current real GDP growth outlook for Q4, as projected by the Atlanta Fed, came in at 1.2% last week,
and the odds of a recession in the next 12 months, per calculations from Bloomberg, held steady at a very elevated 55%,
so one could argue that the Fed thus far has done a good job of bringing inflation down,
without causing too much economic hardship, given that corporate profits have remained very healthy, with the likelihood of continued EPS growth this quarter and into 2024.
Valuations – Stocks, Especially Value, Reasonably Priced
No doubt, all else equal, lower interest rates should be a tailwind for stocks, but as we constantly state, we are braced for additional equity market downside. Still, we see no reason to alter our long-term enthusiasm for equities, especially given the reasonable valuations for Value stocks in general,
and our broadly diversified portfolios of what we believe to be undervalued stocks in particular.
Stock News – Updates on fourteen stocks across seven different sectors
