CWS Market Review – January 17, 2020

“The dangers of life are infinite, and among them is safety.” — Goethe

On Thursday, the S&P 500 closed above 3,300 for the first time ever. If you’re into numerology, the index first broke 330 in 1987, meaning 33 years ago, and it first broke 33 in 1954 which was 33 years before that. I don’t know what it means, but that’s a lot of threes.

In any event, not only is the market moving higher, but it’s been a fairly broad rally. That’s always a good sign. I tend to be suspicious when a market rally leans heavily on just a few stocks. This time, the minnows are joining in. Right now, the number of stocks in the S&P 500 that are above their 200-day moving average is at a five-year high.

The S&P 500 is divided into eleven sectors. Eight are currently at or near new 52-week highs. Two more aren’t that far away. Only Energy is lagging behind, and even that sector has perked up this year.

Here’s another cool stat: The stock market hasn’t had a down election year when an incumbent was running in 80 years.

This week, we got our first earnings report of this season. Eagle Bancorp missed by a penny per share. (Or more accurately, analysts missed reality.) Despite the miss, the bank’s doing just fine. I’ll have more in a bit. I also have a complete Buy List earnings calendar for you. But first, let’s look at some recent economic news.

The Lowest Jobless Rate in Half a Century

Last Friday, the government released the jobs report for December. The U.S. economy created 145,000 net new jobs which was below expectations of 160,000. The unemployment rate fell to its lowest level since June 1969.

The labor market is doing well. The government also tracks a broader measure of employment called the U-6 rate. For December, that rate fell to 6.7% which is the lowest rate since the data series was first tracked in 1994.

The weak spot, however, is wages. To be fair, we’re seeing some improvement here, but we need to see more. Over the past year, average hourly earnings are up by 2.9%. That’s more than inflation, but not by much. Bear in mind that higher wages will eventually translate into higher sales and profits for our companies.

We may be seeing evidence that workers are in demand. There was a recent story that Taco Bell is willing to pay general managers $100,000 per year. The company will also start paying employees 24 hours of sick time each year.

Here’s a look at nonfarm payrolls over the last decade. People who aren’t in finance would be astounded if they knew how much time and energy goes into forecasting this line.

Here’s a remarkable look at how the U.S. economy has changed. If we were to have the same jobs-to-population ratio that we had 20 years ago, we’d need 8.8 million more jobs. We could also achieve it if we had 13 million fewer people. What’s changed is that there are many more retirees.

Despite the lackluster wage gains, consumers were still out at the malls spending money. On Thursday, the Commerce Department said that December retail sales rose by 0.3%. Also, retail-sales growth for November was revised higher to +0.3%. This suggests that the U.S. economy ended 2019 at a moderate pace. In the last year, retail sales grew by 6.1%. That’s close to the fastest pace since 2012.

Remember that consumer spending accounts for two-thirds of the economy. Economists like to watch “core” retail sales, which excludes cars, gas, building materials and food. For December, the core rate was up +0.5%. That’s quite good, and it’s an improvement over the 0.1% increase we had for November.

In fact, the strong jobs market may continue. The recent jobless-claims report fell to 204,000. That’s very good.

Fortunately, there’s been no evidence yet of an uptick in inflation. On Tuesday, the government said that the Consumer Price Index rose by 0.2% last month. That comes after a 0.3% increase in November. For all of 2019, the CPI increased by 2.3%. That’s the highest annual rate in eight years, but it’s still not that high. Importantly, inflation is still close to the Federal Reserve’s target of 2%.

Digging into the numbers a bit, we see that the “core” rate of inflation increased by 0.1% last month. This is the regular inflation rate, except for food and energy prices, which can be very volatile. The core rate was up by 0.2% in November. For the year, the core rate increased by 2.3%.

Overall, these are good numbers, and it looks like the Federal Reserve won’t need to make a move, in either direction, in the immediate future. It’s especially impressive that inflation is so low considering that the unemployment rate is low as well.

The Fed meets again in two weeks. Don’t expect much. In my opinion, the best market proxy for what the Fed will do is the two-year Treasury yield. On Thursday, the two-year yield closed at 1.58%, and that’s right in line with the Fed’s current target of 1.50% to 1.75%.

With the Fed now in reserve, let’s look at our upcoming earnings reports.

Fourth-Quarter Earnings Calendar

Here’s a table of the 21 Buy List stocks that are reporting this earnings season (the other four don’t follow the March/June/September/December cycle). I’ve included each stock’s earnings date, Wall Street’s consensus and the actual results. Please note that not all the dates are out, and the earnings consensus may change.

Company Symbol Date Estimate Result
Eagle Bancorp EGBN 15-Jan $1.07 $1.06
Silgan Holdings SLGN 28-Jan $0.38
Stryker SYK 28-Jan $2.46
Danaher DHR 30-Jan $1.24
Hershey HSY 30-Jan $1.24
Sherwin-Williams SHW 30-Jan $4.39
Church & Dwight CHD 31-Jan $0.55
Check Point Software CHKP 3-Feb $1.99
AFLAC AFL 4-Feb $1.02
Disney DIS 4-Feb $1.48
Fiserv FISV 4-Feb $1.14
Cerner CERN 4-Feb $0.74
Globe Life GL 5-Feb $1.72
Intercontinental Exchange ICE 6-Feb $0.96
Becton, Dickinson BDX 6-Feb $2.64
Moody’s MCO 12-Feb $1.94
ANSYS ANSS tba $1.98
Broadridge Fin Solutions BR tba $0.72
Middleby MIDD tba $1.72
Stepan SCL tba $0.88
Trex TREX tba $0.51

Eagle Bancorp Earned $1.06 per Share

Now let’s look at our first earnings report. After the close on Wednesday, Eagle Bancorp (EGBN) reported Q4 earnings of $1.06 per share. That’s one penny below estimates, and it’s down from $1.17 per share from one year ago.

For all of 2019, Eagle made $4.18 per share. That’s down from $4.44 per year in 2018. The big issue I’ve been watching is Eagle’s legal fees. For Q4, the bank’s legal, accounting and professional fees and expenses rose 68% to $4.1 million. That’s about 12 cents per share.

Here’s what Eagle had to say:

The Company expects to continue to incur elevated levels of legal and professional fees and expenses in 2020 as it continues to cooperate with these investigations. Other than these increased costs, we do not believe at this time that the resolution of these investigations will be materially adverse to the Company. As a result of these ongoing investigations, there have been no regulatory restrictions placed on the Company’s ability to fully engage in its banking business as presently conducted. We are, however, unable to predict the duration, scope or outcome of these investigations.

Looking past these expenses, the bank is doing fine. For Q4, Eagle had a return-on-equity of 11.78%. The bank’s efficiency ratio was 39.7% for the quarter and 40% for the entire year. The legal expenses aren’t pleasant, but it’s a manageable problem. The market clearly over-reacted. Over the summer, the shares plunged $14 per share on the news.

Eagle opened Thursday’s trading down more than 3%, but it quickly righted itself and closed lower by just 0.3%. This is a good bank that’s sailing through some rough seas. Eagle remains a buy up to $53 per share.

Buy List Updates

Danaher (DHR) won’t report earnings until January 30. However, the CEO made some relevant comments at a healthcare conference this week. CEO Thomas P. Joyce, Jr. said that for Q4, Danaher’s sales will come in above the company’s previously-announced expectations. He also said that earnings will be “at or above” the high end of their range.

Allow me to translate. When a CEO says, “at or above,” they mean “above.”

Speaking of Danaher, it, along with a few other of our stocks like Moody’s (MCO) and Fiserv (FISV), has crept above our Buy Below prices. So has Trex (TREX), one of our newbies. It’s already up 11% in 11 trading days. I’m going to hold off adjusting our Buy Below prices until I get a chance to see their earnings reports. As always, there’s never a need to chase after good stocks. You always want to be a disciplined investor.

That’s all for now. The stock market will be closed on Monday in honor of Dr. Martin Luther King, Jr.’s birthday. Dr. King would have been 91. Next week will be dominated by earnings news. There’s not much in the way of economic reports next week. On Wednesday, the new-homes sales report is out. Then on Thursday, the jobless-claims report comes out. The last report was for 204,000, which is a very low number. 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 January 17th, 2020 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.