CWS Market Review – December 13, 2019

“The labor market remains strong and that economic activity has been rising at a moderate rate.” – This week’s FOMC policy statement

Wall Street is in a festive mood this holiday season. The S&P 500 just closed at another new all-time high. The index is now up 26.4% for the year. That’s the 27th time this year that the S&P 500 has broken records.

This week, the Federal Reserve decided against changing interest rates. In fact, the Fed’s outlook suggests they won’t touch rates during all of next year as well. Last week, we also had another strong jobs report. The unemployment rate is now down to a 50-year low. And it looks like we might finally get some sort of trade deal with China.

In this week’s CWS Market Review, we’ll take a closer look at what the Fed had to say. I also want to discuss how the U.S. economy is doing. Later on, I’ll preview next week’s earnings report from FactSet. (And don’t forget that on Christmas Day, I’ll be sending you the stocks for the 2020 Buy List.) But first, let’s look at last week’s jobs report.

The U.S. Economy Is Still Creating Jobs

Last Friday, the government released the November jobs report, and the numbers were quite good. The U.S. economy created 266,000 net new jobs last month. The forecast had been for 187,000. There were also positive revisions of 41,000 jobs (13,000 to September and 28,000 to October).

Manufacturing saw an increase of 54,000 jobs. Motor vehicles and parts rose by 41,000 thanks to the end of the GM strike. Healthcare, as well as leisure and hospitality, rose by 45,000.

The unemployment rate ticked down to 3.5%, which is a 50-year low. The U-6 Rate, which is a broader measure of joblessness, ticked down 0.1% to 6.9%. The labor-force participation rate is 63.2%. That also fell by 0.1%.

The jobs market is the best it’s been in a generation. The investment writer Gary Alexander notes some interesting stats. The number of Americans able to work but not actively seeking jobs fell by 432,000 (-27%) over the last year. Only one-fifth of the 3.5% jobless have been out of work for 27 weeks versus 45% of the jobless who were out of work that long in 2011. In Ames, Iowa, the unemployment rate is just 1.3%.

The weak point is still wages. For November, average hourly earnings rose seven cents to $28.29. In the last year, wages are up 3.1%. That’s actually an improvement, but we still need to see more. Wages eventually become revenue.

On Thursday, we got an unusually high jobless-claims report. It was the highest in more than two years. The number tends to be “noisy,” so I’m not concerned just yet, but it’s something to take note of.

Fortunately, inflation still isn’t a problem. On Wednesday, the government said that inflation rose 0.3% in November. That topped expectations by 0.1%. Part of the rise was due to gasoline prices. In the last 12 months, consumer prices are up 2.1%.

The core rate, which excludes food and energy, rose by 0.2% in November. In the last year, core prices rose by 2.3%. The important point is that the Fed is still below the inflation rate. This means that real rates are negative. They had been positive a few months ago. So where do rates go from here?

In this week’s Fed policy statement, the central bank had good things to say about the economy. The Fed said the labor market is strong and the economy is growing at a moderate rate. Household spending is rising at a strong pace, and inflation is tame. The Fed noted that two weak areas are business fixed investment and exports.

The Fed decided against raising rates, and the decision was unanimous. The Fed hasn’t had a one-sided vote in several months. Fed Chairman Jay Powell said that the recent rate cuts were merely mid-cycle adjustments. There were a lot of doubters, but it appears that Powell has prevailed.

The Fed also released its economic projections for the next few years. According to the median vote, the Fed doesn’t see itself changing rates all next year. Even in 2021, the Fed forecasts one rate change, and again, no changes in 2022.

Permit me one econo-nerdy point. In the Fed’s projections, they forecast a “long run” rate for different data series. They peg the long-run interest rate at 2.5% and the long-run inflation rate at 2.0%. Frankly, those are pretty meaningless, but with one exception. This implies that the Fed sees the neutral real rate at 0.5%.

For years, the neutral rate was assumed to be about 2%, give or take. If someone told you 10 or 15 years ago that the Fed would eventually see the neutral rate at 0.5%, they would have been stunned. The lower neutral rate has changed so many basic assumptions about the financial markets, and getting used to it has caused a lot of the doomsday crowd to miss a great stock market. Now let’s look at our Buy List earnings report for next week.

Earnings Preview for FactSet

FactSet (FDS) is due to report its fiscal Q1 earnings on Thursday, December 19. Three months ago, the company had a very good earnings report. The problem was that guidance was below expectations.

For its fiscal Q4, FactSet said that revenues rose 5.3% to $364.3 million. Annual Subscription Value, or ASV, rose to $1.48 billion. Quarterly earnings rose 18.6% to $2.61 per share. Wall Street had been expecting $2.47 per share.

This was FactSet’s 39th year in a row of revenue growth and 23rd year in a row of EPS growth. I was particularly glad to see FactSet’s operating margin come in at 33.9%. For the quarter, client count rose by 119 to 5,574. User count rose by 3,871 to 126,833. FactSet’s annual retention rate is running at 89%. The company now has 9,681 employees.

Now let’s look at guidance, and let’s bear in mind that FDS is being quite conservative. The company sees earnings for the current fiscal year (ending in August 2020) ranging between $9.85 and $10.15 per share. That’s basically no growth at all. The range is -1.5% to +1.5%. Wall Street had expected $10.52 per share.

FactSet sees revenues ranging between $1.49 billion and $1.50 billion. That’s up from $1.44 billion for the year that just ended.

Regarding guidance, I want to remind you that FactSet’s initial guidance for last year was $9.50 to $9.65 per share, and they ended up making $10.00 per share. That should tell you how they look to keep expectations low.

The shares took a big hit in September, but FDS has made back most of the lost ground.

Buy List Updates

Disney (DIS) has another big hit with Frozen 2. Elsa and her friends will soon top $1 billion at the box office. That will be Disney’s sixth billion-dollar release this year. Of course, that doesn’t include Star Wars, which is due out in a few days. All told, Disney has made $10 billion at the box office this year. The new streaming service, Disney+, has been downloaded 22 million times. Disney remains a buy up to $152 per share.

RPM International (RPM) said it will release its fiscal Q2 earnings before the bell on January 8. The consensus on Wall Street is for earnings of 73 cents per share.

Danaher (DHR) is giving its shareholders an option to buy shares of Envista (NVST) that DHR owns. Envista used to be Danaher’s dental business. Now it’s a stand-alone company with its own stock.

The deal works like this: You can get 5.5784 shares of NVST for each share of DHR you tender.

For Buy List purposes, we’re not taking the deal because it would violate our set-and-forget philosophy, but it’s not a bad one for shareholders. The ratio works out to a 4.5% discount for NVST based on Thursday’s close.

I’ll caution you that you might not get all the shares you want. That’s just how these deals work. Remember that as a DHR shareholder, you’ll still own some NVST indirectly. The deal expires at midnight tonight. I’m raising my Buy Below on Danaher to $155 per share.

I also want to raise my Buy Below prices on two more our Buy List stocks. This week, I’m lifting my Buy Below on Moody’s (MCO) to $245 per share, and I’m lifting Signature Bank (SBNY) to $141 per share.

That’s all for now. Next week will be rather light for economic news. On Tuesday, we’ll get the report on industrial production. On Thursday, the existing-home-sales report is due out. Then on Friday, we’ll get the second revision to the Q3 GDP report. The last revision showed growth of 2.1%. 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 December 13th, 2019 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.