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, Interest Rates, Profits and AAII Sentiment. 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.
Newsletter Portfolio Trades – One Sale & Six Buys
Volatility – The Longer the Hold the Less the Chance of Loss
Conventional Wisdom – Stocks Historically Have Moved Higher no Matter the Headwind
Interest Rates – Yields Jump; Stocks Hold Their Own
Econ Stats – Excellent Labor Report; Other Stats Mixed
Profits – Favorable EPS Outlook
Valuations – Liking our Metrics
Sentiment – AAII Bullishness Pulls Back
Stock News – Updates on AYI, BLK & 21 Undervalued Dividend Payers
Volatility – The Longer the Hold the Less the Chance of Loss
In yet another reminder that volatility, which many equate to potential losses, dissipates the longer the measuring stick,
the equity market roller-coaster ride last week ended about where it started, with the Dow Jones Industrial Average eking out a 58-point gain (or 0.14%) for the five days,
Conventional Wisdom – Stocks Historically Have Moved Higher no Matter the Headwind
pushing the advance thus far for the historically seasonally weak September-October time frame,
to a solidly positive 2.07%.
No doubt, stocks could have moved the other way, and there is no assurance that the rally will continue, especially given the escalation of hostilities last week in the Middle East, but it is fascinating that the major market averages have soared 30% or so since the start of the Israel-Hamas War one year ago.
Interest Rates – Yields Jump; Stocks Hold Their Own
We suspect the equity performance related to the Arab-Israeli Conflicts shown in the table above may be surprising, but conventional wisdom is often defied when it comes to the stock market. Last week provided another example, as the positive returns came despite a major jump in interest rates, with the yield on the 10-Year U.S. Treasury climbing to 3.97%, up from 3.75% the week prior.
Of course, the evidence dating back nearly a century reveals that stocks perform fine, on average, whether the benchmark government bond yield is rising or falling,
and last week’s spike in rates was tied to a big market reassessment in the pace and scale of Federal Reserve cuts in the Fed Funds rate. Indeed, the futures betting now projects a year-end ’24 rate of 4.28% and a year-end ’25 rate of 3.29%, a sizable increase from respective figures of 4.06% and 2.85% a week prior.
Econ Stats – Excellent Labor Report; Other Stats Mixed
No doubt, the catalyst for the change in interest rate heart was a much better-than-expected labor report for September released on Friday morning. Not only were there 254,000 new nonfarm payrolls created during the month, well above estimates of 150,000, the tallies for July and August were revised higher by 72,000,
and the unemployment rate ticked down to 4.1%,
while wages advanced a better-than-projected 4.0% on a year-over-year basis.
Other economic data out last week was mixed as factory orders for August dipped 0.2%,
and the ISM Manufacturing Index (PMI) for September trailed forecasts with a reading of 47.2, the same tally as reported in August.
Of course, history shows that low PMI readings have led to far higher than usual equity market gains, on average, while the folks at ISM state that a PMI of 47.2 has in the past correlated to real (inflation-adjusted) U.S. GDP growth of 1.3%.
That real GDP number would appear to be on the low side, given that the ISM Services Index (NMI) for September crushed expectations with a rise to 54.9, up from 51.5 in August and projections of 51.7. Per ISM, an NMI of 54.9 corresponds to a 1.9% increase in real GDP on an annualized basis,
while the Atlanta Fed’s most recent guess (pre-jobs report) for real GDP growth in Q3 stood at 2.5%,
job openings for August of 8.04 million blew past expectations of 7.7 million,
and first-time filings for unemployment benefits in the latest week of 225,000 continued to reside near multi-generational lows.
Certainly, anything can happen as we move forward, but the latest economic numbers bolster the so-called soft landing scenario reflected in the Federal Reserve’s latest projections,
Profits – Favorable EPS Outlook
which would provide a favorable backdrop for continued growth in corporate profits,
with additional, albeit not as speedy as some traders might like, cuts in interest rates still likely, which in our view would add to the valuation argument for more inexpensively priced stocks in general, such as those in the Russell 3000 Value index,
Valuations – Liking our Metrics
and our broadly diversified portfolios, in particular.
So, while we continue to be braced for downside (and upside) volatility, as it will always be par for the course for those focused on building long-term wealth, we remain optimistic that equities will continue to provide terrific rewards over time as has been the case since the launch of The Prudent Speculator more than 37 years ago.
Sentiment – AAII Bullishness Pulls Back
We also are pleased, given our contrarian bent, to see the folks on Main Street become a little less Bullish last week,
with the 8th decile on the American Association of Individual Investors Bull-Bear Spread one of the better ones for subsequent equity market returns.
Stock News – Updates on two stocks across two different sectors
