Federal Reserve, 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 Federal Reserve, 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

Miracle of Compounding – 11.5% Annualized Return on the $10 Billion Sale Price for the Lakers

Volatility – The Longer the Hold, the Less the Chance of Loss

Wall of Worry – Always Something to Fret About, but Long-Term Trend has been Higher

Fed – Uncertainty Abounds, No Rate Cut Yet

Econ News – Weaker-than-Expected Numbers but Growth Still the Forecast

EPS – Corporate Profit Growth in 2025 and 2026 Remains the Expectation

Interest Rates – Fed Funds & Equity Returns

Valuations – Attractive Metrics for Value Stocks

Sentiment – AAII Flashing a Contrarian Buy Signal

Stock News – Comments on JBL & KR & FSLR

Miracle of Compounding – 11.5% Annualized Return on the $10 Billion Sale Price for the Lakers

It was a good four-day trading week for the proverbial soldiers versus the generals as the S&P 500 Equal Weight index gained 0.21% on a total return basis, compared to a drop of 0.12% for the capitalization-weighted S&P 500. True, a return of 0.21% in a week doesn’t sound grand, but it annualizes to 11.5%, which, believe it or not, is the return earned by the Buss Family on the $67.5 million purchase in 1979 of the Los Angeles Lakers after the sale of the iconic NBA franchise for a whopping $10 billion was announced last week.

Volatility – The Longer the Hold, the Less the Chance of Loss

The Miracle of Compounding can lead to spectacular wealth creation when solid returns and time get together, so we devote a substantial amount of real estate in these missives to facts and figures aimed at keeping investors on track to achieving their long-term objectives. After all, as Lao Tzu said, “If you do not change direction, you may end up where you are heading!”

Still, we respect that navigating equity market gyrations is not easy, so we constantly encourage lengthening the measuring stick used to evaluate returns. As we have often pointed out, the longer the holding period over the last century, the less the chance of loss,

and though last week saw significant volatility on an intra-day basis, the popular Dow Jones Industrial Average ended virtually unchanged on Friday, with a 9-point advance from the prior Friday, so on a week-to-week basis it was one of the least volatile periods in history.

Wall of Worry – Always Something to Fret About, but Long-Term Trend has been Higher

No doubt, the latest week was filled with drama as the Israel-Iran conflict escalated and the U.S. was contemplating involvement…which happened on Saturday. Of course, history shows that trouble in the Middle East is not reason for long-term-oriented folks to sell stocks,

and it has been the same story for any of the other many disconcerting headlines that through the years have been part of the investment landscape.

True, we always must be braced for 10% corrections along the way, as there have been 39 of them since the launch of The Prudent Speculator in March 1977

and even Bear Markets of the unofficial,

and official variety are an inevitable part of the investment process,

but the long-term trend in stock prices has been higher.

Fed – Uncertainty Abounds, No Rate Cut Yet

To be sure, there was market-moving news out last week on the economic front as the Federal Reserve again chose to leave its target for the Fed Funds rate unchanged at a range of 4.25% to 4.5%,

with the FOMC Statement asserting, “Uncertainty about the economic outlook has diminished but remains elevated,” even as President Trump and others shouted for a rate cut.

but he offered the following response to the question, “Do you see any concerns that the economy is weakening and that is a reason to cut rates going forward?”

So we do, we do of course monitor all those things. I think if you look at the overall picture, what you’re seeing is 4.2 percent unemployment, and an economy that’s growing at a rate hard to know given the unusual flows in the first quarter, but it appears to be 1-1/2, 2 percent, maybe a little better than that. Sentiment has come up off of its very low levels. It’s still, it’s still depressed, so you can point to things, the housing market is a longer run problem, and also a short run problem. I don’t think it’s indicative of — basically situations, we have a longer run shortage of housing, and we also have high rates right now. I think the best thing we can do for the housing market is to restore price stability in a sustainable way and create a strong labor market, and that’s the best thing we can do for the housing market. You asked about the job market, again, look at labor force participation, look at wages, look at job creation. They’re all at healthy levels now. I would say you can see perhaps a very, very slow continued cooling, but nothing that’s troubling at this time. But we watch it very, very carefully. So overall, again, the current stance of monetary policy leaves us well-positioned to respond in a timely way to economic developments, for now, and we’ll be watching the data carefully.

Econ News – Weaker-than-Expected Numbers but Growth Still the Forecast

The economic numbers out last week seemed to support the case for rate cuts, as housing starts for May at a 1.256 million annual rate trailed expectations,

as did homebuilder sentiment, which dropped to the lowest level since the end of 2022.

Important readings on the health of the factory sector also were disappointing, with both the Empire Manufacturing index for June,

and the Philadelphia Fed index this month trailing estimates and residing in negative territory.

Retail sales excluding autos and gasoline for May dropped 0.1%, below projections of a 0.3% increase and down from April’s revised increase of 0.1%,

but first-time filings for unemployment benefits in the latest week matched estimates of 245,000.

On the other hand, the latest estimate for real (inflation adjusted) GDP growth from the Atlanta Fed for Q2 stood at a solid 3.4%,

and the forward-looking Leading Economic Index for June was predicting real GDP growth for 2025 of 1.6%.

Certainly, anything can happen, and it it isn’t like the U.S. economy is booming, but none of the Fed, the World Bank,

or the OECD is projecting a recession this year,

EPS – Corporate Profit Growth in 2025 and 2026 Remains the Expectation

with positive real and stronger nominal economic growth supporting the case for continued growth in corporate profits.

Interest Rates – Fed Funds & Equity Returns

And, if the betting odds in the Fed Funds futures market are to be believed, we could actually have a couple of rate cuts before year end,

with lower interest rates not a bad thing when it comes to equity valuation comparisons,

even as history shows that stocks, especially Value and Dividend Payers, have done fine, on average, whether America’s central bank is tightening or easing monetary policy.

Understanding that tariffs also continue to be a major wildcard,

Valuations – Attractive Metrics for Value Stocks

we see no reason to alter our enthusiasm for the long-term prospects of our broadly diversified portfolio of what we believe are undervalued stocks,

Sentiment – AAII Flashing a Contrarian Buy Signal

and we are not unhappy to see the pessimists return on Main Street, with the AAII Bull-Bear Sentiment Survey retreating in optimism,

as this gauge has been a solid contrarian indicator, on average, over the past 48 years, with the subsequent returns data in the chart below illustrating that investors should be greedy when others are fearful.

Stock News – Updates on three stocks across three 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.