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 valuations, history lessons, econ stats, interest rates 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 – Trimmed ETN and Bought 8 Stocks in Four Accounts
Week In Review – Sizable Pullback; Average Stock Much Worse than the Capitalization-Weighted Indexes
Econ Stats – Good News Evidently is Bad News
Growth – Not Unhappy About Expanding GDP, Corporate Profits and Dividend Payouts
Interest Rates – 10-Year Yield and Odds of a Hike in the Fed Funds Rate Rise
History Lessons – Recessions & Fed Inflation Fight No Reason to Sell Stocks
Valuations – Value Stocks Are Attractively Priced
Stock News – Updates on eight stocks across six different sectors
Week In Review – Sizable Pullback; Average Stock Much Worse than the Capitalization-Weighted Indexes
While stocks managed a modest rebound on Friday, the holiday-shortened trading week saw plenty of red ink. Believe it or not, the average constituent in the broad-based Russell 3000 Index skidded 3.60%, even as the capitalization-weighted indexes masked some of the damage inflicted on most stocks.
Of course, the Russell 3000 Value index retreating “only” 1.56% was nothing to cheer about, though we know that volatility is not unusual. Indeed, last week’s drop in that benchmark was “only” the 272nd worst week since its inception in 1995. Happily, there have been 338 weeks with gains of equal or greater magnitude and the overall long-term return on Value stocks continues to top the charts since the launch of The Prudent Speculator in March 1977.
Econ Stats – Good News Evidently is Bad News
Although there are many reasons for equity gyrations, given always-fickle market participants, most are attributing the latest pull back to better-than-expected economic data. The Institute for Supply Management’s (ISM) Non-Manufacturing Index for August came in at 54.5, well above the estimate of 52.5 and up from the 52.7 tally registered in July.
ISM explained, “A Services PMI® above 49.9 percent, over time, generally indicates an expansion of the overall economy. Therefore, the August Services PMI® indicates the overall economy is growing for the eighth consecutive month after one month of contraction in December 2022.” ISM went on to say, “The past relationship between the Services PMI® and the overall economy indicates that the Services PMI® for August (54.5 percent) corresponds to a 1.6-percent increase in real gross domestic product (GDP) on an annualized basis.”
As if that weren’t bad enough (tongue firmly planted in cheek), first-time filings for unemployment benefits fell to 216,000 in the week ended September 2, the lowest level since February.
And even though the Commerce Department reported that orders for manufactured goods dropped by 2.1% in July, the pullback was better than the 2.3% decline projected. What’s more, factory orders excluding the transportation sector rose 0.8% in July.
The latest batch of relatively positive economic news kept the Atlanta Fed’s projection of real (inflation-adjusted) Q3 GDP growth at a very robust 5.6%,
and allowed the most recent estimates for corporate profit growth to remain very healthy.
Growth – Not Unhappy About Expanding GDP, Corporate Profits and Dividend Payouts
Given that we invest in businesses that historically have increased in value over time as U.S. GDP has expanded,
and dividend payouts from Corporate America have risen year after year,
Interest Rates – 10-Year Yield and Odds of a Hike in the Fed Funds Rate Rise
we are not unhappy to see favorable economic data, even as interest rates moved higher last week,
and expectations for additional hikes in the Fed Funds rate ticked up.
History Lessons – Recessions & Fed Inflation Fight No Reason to Sell Stocks
Such was the view of the Fed Funds futures market, even as Fed Governor Christopher Waller stated earlier last week, “There is nothing that is saying we need to do anything imminent anytime soon. We can just sit there and wait for the data.”
Of course, Boston Fed President Susan Collins reminded, “This phase of our policy cycle requires patience, and holistic data assessment, while we stay the course. And while we may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data.”
New York Fed President John Williams added, “We’ve got policy in a good place, but we’re going to need to continue to be data-dependent. We’ll have to keep watching the data carefully analyzing all of that and really asking ourselves the question: is this sufficiently restrictive.”
Needless to say, the Fed will remain data-dependent in its approach to monetary policy going forward, though it is fascinating that the odds of recession in the next 12 months, per Bloomberg, reside at 60%.
Valuations – Value Stocks Are Attractively Priced
We have no economic crystal ball nor do we have any ability to predict what the Federal Reserve will say or do at the upcoming FOMC Meeting September 19-20. But what we do know is that stocks have performed admirably, on average, in the 12 months before recessions AND sensationally, again on average, coming out of economic contractions,
while the last Fed fight with inflation resulted in fantastic gains for Value Stocks and Dividend Payers like those that we have long favored.
There is never any guarantee that the past is prologue, but we continue to think that Value Stocks are reasonably priced relative to where interest rates reside,
and they are inexpensive relative to where they have traded over the last 28 years,
so we remain very comfortable with our broadly diversified portfolios of what we believe to be undervalued stocks.
Stock News – Updates on eight stocks across six different sectors
