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 Interest Rates, Valuations, the Federal Reserve Meeting 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.
Market Rebound – Big Bounce off the Siegel Low Continues
Volatility – Ups & Downs but Long-Term Trend is Up
Interest Rates – Fed Cuts Coming
Jackson Hole – Powell Still Sees Soft Landing
Valuations – Value Remains Attractive
Econ Outlook – GDP & EPS Growth Still the Forecast
Market History – Arab/Israeli Conflicts & Equity Returns
Market of Stocks – TPS H2 Winners & Losers
Stock News – Updates on MDT, LOW & TGT
Market Rebound – Big Bounce off the Siegel Low Continues
As usual, there were plenty of market gyrations last week, but stock prices generally moved higher, with the Dow Jones Industrial Average advancing more than 500 points, retaking the 41,000 level and extending the rebound to more than 6%,
since panic-selling gripped traders the morning of August 5.
Volatility – Ups & Downs but Long-Term Trend is Up
Certainly, we realize that stocks could have continued south three weeks ago, as, on average and dating back to 1995, retreats of at least 7.5% in the Russell 3000 Value index happen every 7 months or so, corrections of 10% or more have taken place every 11 months and even Bear Markets of 20% or greater have occurred every 2.9 years.
However, history shows that equities have enjoyed advances with similar frequency, and the periods in the green have seen gains of far larger magnitude, so much so that the long-term returns for stocks, especially those of the Value variety, have been terrific since the launch of The Prudent Speculator in March 1977,
with all disconcerting events overcome in the fullness of time.
Interest Rates – Fed Cuts Coming
To be sure, the equity market volatility last week was mostly to do with interest rates and their outlook as investors awaited Friday’s speech by Jerome H. Powell: “Reassessing the Effectiveness and Transmission of Monetary Policy,” an economic symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming.
Jackson Hole – Powell Still Sees Soft Landing
The Fed Chair began…
Four and a half years after COVID-19’s arrival, the worst of the pandemic-related economic distortions are fading. Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic. Supply constraints have normalized. And the balance of the risks to our two mandates has changed. Our objective has been to restore price stability while maintaining a strong labor market, avoiding the sharp increases in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored. While the task is not complete, we have made a good deal of progress toward that outcome.
He continued…
Overall, the economy continues to grow at a solid pace. But the inflation and labor market data show an evolving situation. The upside risks to inflation have diminished. And the downside risks to employment have increased. As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate.
And it was this portion of the speech that lit a fire under stocks on Friday, as traders added to bets for a series of interest rate hikes over the balance of this year and into 2025…
The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.
We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market. The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.
Certainly, we understand why lower interest rates are viewed favorably as a friendly Fed historically has been a positive for stocks in general, and Value and Dividend Payers in particular,
while the lower the yield on the 10-Year Treasury, all else equal, the more attractive the valuations for the kind of stocks we have long championed.
Valuations – Value Remains Attractive
Of course, we were also buoyed by Mr. Powell’s faith in the strength of the economy as the most recent Fed projections for solid real (inflation-adjusted) GDP growth,
should provide a positive backdrop for corporate profits over the balance of 2024 and 2025.
Econ Outlook – GDP & EPS Growth Still the Forecast
with the odds of recession, as tabulated by Bloomberg, remaining relatively low,
and even the arguably pessimistic negative reading on the Leading Economic Index for July prompted the Conference Board to state it “no longer signals recession ahead.”
It was a relatively light week for other economic statistics, with both July numbers on existing home sales,
and new home sales coming in modestly better than expected,
while the S&P Global U.S. Services Index for August also topped projections.
On the other hand, the S&P U.S. Manufacturing Index this month trailed estimates,
and there were a few more first-time filings for unemployment benefits in the latest week than forecast.
We doubt that there will be a big move in the Atlanta Fed’s outlook for decent Q3 real U.S. GDP growth when next it is updated later today,
and we see no reason to alter our enthusiasm for the long-term prospects of our broadly diversified portfolios of what we believe are undervalued stocks,
even as we respect that we must be braced for downside moves as events on the geopolitical stage are always a wildcard,
Market History – Arab/Israeli Conflicts & Equity Returns
Market of Stocks – TPS H2 Winners & Losers
and we offer our constant reminder that it is a market of stocks and not simply a stock market as a look at the TPS Winners and Losers thus far in the second half of 2024 will attest.
Stock News – Updates on three stocks across two different sectors
