CWS Market Review – September 15, 2017

“Fear is an emotion, not a stock indicator.” – Coreen T. Sol

After eight and a half years, the stock market is still hitting fresh all-time highs. The Dow, S&P 500 and Nasdaq all broke out to new highs this week. Here’s a cool stat: since the election, the S&P 500 has added $2 trillion in market value, and half of that is due solely to the tech sector. The much-hated rally marches ever onward.

The S&P 500 even came close to breaking through 2,500 for the first time in its history. Thursday’s intra-day high was 2,498.43. For some context, the S&P 500 first broke 25 in 1929, and it smashed 250 in 1986.

The historically-minded observer may have noticed that those milestones came just before some unpleasantness. I still think we’re pretty safe from any nasty downturns. Inflation, interest rates and unemployment are low, and the economy continues to hum along.

In this week’s CWS Market Review, I want to focus on a key aspect that’s been helping the market this year: the weak U.S. dollar. This is a crucial factor, and it’s not widely understood. The currency markets can have a big impact on the stock market, and I want to explain what’s happening. Later on, I’ll update you on some of our Buy List stocks. Cerner became our first stock to be up 50% for this year. I hope there will be more. Before we get to that, though, let’s see why the falling greenback has been our secret helper this year.

The Weak-Dollar Rally

The U.S. dollar has not been in a good way this year, and that’s actually a good thing. Look at some of the numbers. Earlier this year, a British pound was worth $1.20. Now it’s going for $1.34. The euro’s gone from $1.05 to $1.19. The euro rally may have further room to run. The Financial Times recently reported that “speculators were holding the biggest net long position on the euro against the dollar since May 2011.”

This is important to understanding what’s happening in today’s market. Despite a good year for stocks, both the Dow and S&P 500 would be down for the year if they were priced in euros. The slumping dollar has not only helped us rally, but it’s affected the nature of the rally. Let’s dig into this some more.

Right now, the economy of the United States is out of sync with much of the developed world, especially Europe. The economy in Europe is basically where we were two or three years ago. Only now are things starting to look up for the Old World. This week, we learned that the British unemployment rate dropped to a 42-year low. Unemployment in Germany is the lowest since reunification. Even France is improving.

As a result, there’s a growing belief that Mario Draghi and the European Central Bank will pull back on their “kitchen sink” strategy for monetary policy. On top of that, the plan for more rate hikes in the U.S. seems to have faded. Capital naturally flows to where it’s treated best, and lately, that’s been away from the USA.

A good example of the dollar’s impact can be seen at AFLAC (AFL), one of our Buy List favorites. The duck stock does a huge amount of business in Japan. As a result, the stock tends to be affected by the dollar/yen exchange rate. A few years ago, the strong dollar routinely dinged several cents per share out of each quarterly earnings report. Now that’s changed. As the yen has crept higher this year versus the dollar, it’s been good for shares of AFL. Recently, AFL jumped above $82. Compare that with the early part of last year, when AFL was going for $55 per share.

No doubt, AFLAC is a good company. But we have to agree that the currency market has given the stock a nice boost.

Now here’s where it gets complicated. Normally when we see the dollar slump, it often means that commodity prices are rising. In turn, that’s good for commodity stocks. Indeed, that’s been the case, as the S&P 500 Materials ETF (XLB) has done quite well this year, especially in the last six months. Did you know that Alcoa is up nearly 60% this year? That’s more than Apple, Facebook, Google or Amazon.

But what’s interesting is that energy stocks haven’t joined in the rally. The energy sector got slammed in 2014-15. While last year saw a modest recovery, this year has been more of nothing. OPEC is even talking about extending its production cuts. Exxon and Chevron are both down for the year. Fortunately, our Buy List doesn’t have any oil stocks.

Normally, we see materials and energy stocks behaving somewhat alike. Not this year. Why? That’s hard to say. It may reflect an emerging global recovery that’s skipped over the energy patch. Nearly every kind of metal has been booming. Zinc recently touched a 10-year high. Copper’s had a strong year as well (except for a nasty correction in the past week). Aluminum is up as well. And for the goldbugs, gold is up smartly this year.

This tells me that there’s demand for industrial metals, which means there’s a demand for industry. For example, the homebuilders are having a good year. The materials trend filters down to Buy List stocks such as Sherwin-Williams (SHW) and Axalta Coating Systems (AXTA).

We’re seeing a similar effect happening in defensive stocks. Healthcare and consumer staples normally tack each other fairly well, but not this year. It’s been a good year for healthcare stocks. On our Buy List, Stryker (SYK) is up more than 20% for us this year. But the consumer staples stocks have lagged, sometimes badly. On our Buy List, Hormel Foods (HRL) and Smucker (SJM) are both in the red.

Especially weak lately has been the financial sector. Typically, financial stocks rally when short-term interest rates rise. Or, more accurately, the hope for higher short rates rises. Financial stocks soared after last year’s election but haven’t done much of anything since then. August was an especially bad month for financials. Later on, I’m going to highlight Signature Bank (SBNY), which I think has finally fallen to a very good price point.

The tech sector has also been very strong this year. The S&P 500 Tech Sector ETF (XLK) is now up 22% this year. On our Buy List, we’ve seen the tech effect with Microsoft (MSFT), which is a 20% winner YTD. Many of the tech stocks have a global reach, so the weak dollar is a positive.

The weak dollar has also followed the small-cap sector lower. Both peaked after the election late last year, and both have drifted lower this year. This may be having an effect on the market’s appetite for risk. With volatility so low, there’s not much room for action for excitable day traders. As a result, this may be pushing them towards more extreme markets like bitcoin. I can’t be positive, but there may be a direct relationship between the stock market’s calmness and bitcoin’s frenzy. The virtual currency is down by one-third in the last 12 days.

What to do now: Wall Street is largely in a state of limbo until Q3 earnings season begins in another month. The recent economic numbers look good. The Fed may even be leaning towards a December rate hike. (I hope not, but it’s possible.)

It’s important for investors not to be scared out of this market. The fundamentals are strong, but the market is always vulnerable to a near-term hit. I also think it’s possible that a dollar rally could cause an internal market rotation.

As always, I like the stocks on our Buy List. Stocks like Ross Stores (ROST), Intercontinental Exchange (ICE) and Signature Bank (SBNY) look especially good here. Now let’s look at some updates to our Buy List stocks.

Buy List Updates

I had wanted to wait a bit before I updated some of our Buy Below prices, but now that we’re in the quiet period of September, I think this is a good opportunity for us to make some adjustments.

Cerner (CERN) continues to be a very strong performer. Cerner is now up 52% on the year for us. It’s our #1 performer. Last year, it was our #2 worst stock. Funny how that happens. In July, the healthcare-IT company had another solid earnings report. Cerner also narrowed its full-year EPS guidance from $2.44 to $2.56, to $2.46 to $2.54.

The next earnings report should come out in late October. The company expects Q3 earnings between 61 and 63 cents per share. This week, I’m raising my Buy Below on Cerner to $76 per share.

Look for Microsoft (MSFT) to raise its dividend next week. The current quarterly payout is 39 cents per share. I’m expecting 42 cents, maybe 43 cents per share. In the last seven years, the software giant has tripled its dividend. Too many investors look past dividends. This is a mistake. Consider this stat: If MSFT goes to 43 cents, that means an investor who got the stock at the start of the bull market would be yielding 11.6% based on their purchase price. Not too bad. I’m keeping my Buy Below for Microsoft at $76 per share.

I previously said I wanted to hold off on raising my Buy Below price for Continental Building Products (CBPX), but I’ve been impressed with the stock’s resiliency. The shares got a boost after Hurricane Harvey. I’m going to lift my Buy Below on CBPX to $26 per share.

Signature Bank (SBNY) has been a very frustrating stock to watch. It soared after last year’s election. The shares gained 21% in just four days. But it’s been a wreck ever since, especially since June. Lately, SBNY seems to go down every single day. On Thursday, the shares dropped below $120. The next earnings report should be out around mid-October. I’m lowering my Buy Below on Signature to $130 per share.

That’s all for now. The Federal Reserve gets together on Tuesday and Wednesday of next week. I don’t expect them to make any interest-rate moves, but there could be signals about their plans for December. The Fed’s policy statement will come out at 2 pm ET on Wednesday. After that, Fed Chairwoman Janet Yellen will answer questions at a press conference. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on September 15th, 2017 at 7:08 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.