CWS Market Review – March 26, 2021

“The great fortunes in stocks have not usually been made by people who give stop orders.” – Charles Dow

The stock market ran into some minor turbulence this week. The S&P 500 fell four times in five days before an impressive rebound and reversal on Thursday. Once again, the index’s 50-day moving average proved to be the key support level. This isn’t the first time. Over the last two months, the S&P 500 has dipped below its 50-DMA a few times, but not for long. Each time, stocks have rallied back.

I fear that investors are becoming overly reliant on minor drops quickly reversing themselves. On Wall Street, easy patterns work right until the moment they stop. The stock market has rallied fairly consistently over the last five months. We may be due for a dust up soon. I’m not predicting anything scary, but I am urging caution and patience.

Honestly, this is a fairly quiet time for Wall Street. The Fed just had its meeting, and the Q1 earnings season is still a few weeks away. Volatility is low, and the VIX is back below 20. This week, Federal Reserve Chairman Jay Powell and Treasury Secretary Janet Yellen testified on Capitol Hill about the economy. Both reiterated the position we’ve been making for a few weeks, which is that the economy is doing pretty well, and the higher bond yields are a reflection of that.

In this week’s issue I want to cover some of the recent economic news. It’s been a bit soggy, but nothing to worry about. I also want to preview what to expect when Q1 earnings season starts. Wall Street has a lot riding on this. I’ll also preview FactSet’s earnings report, which is due out on Tuesday. I also have some Buy List updates for you. But first, let’s take a closer look at some recent economic news.

February Was Tough, but the Economy Is Getting Better

On Thursday, the government said that jobless claims fell to 684,000. It’s odd saying that’s good news, but in the Age of the Coronavirus, that’s good news. That’s a post-pandemic low, yet it’s still higher than the highest claims number from 12 years ago. Context is everything.

This week, we got reports on new- and existing-home sales. Both reports were fairly weak, but harsh February weather probably held back those numbers. Overall, the housing market remains fairly strong. In fact, housing inventory is at very low levels. The CEO at Redfin said that lack of inventory was like a Soviet-era supermarket. Housing inventory usually runs around six months’ supply. Now it’s close to one or two months. This is happening in housing markets all across the country.

The durable-goods report was also below expectations. During the initial lockdown, the durable-goods numbers took a big hit, but they had been improving since then. That is, until February. Expectations were for an increase of 0.4%. Instead, durable goods declined by 1.1%.

Economists also like to look at “core” durable goods, which excludes aircraft. Core durable goods fell 0.8% last month. Again, weather was clearly a factor. But I think it points at the broader view that while the economy is improving, it’s not happening at an even pace.

On Thursday, the government revised the Q4 GDP growth report up to 4.3%. That’s an annualized number, and it’s adjusted for inflation. The previous estimate was for growth of 4.1%. The economy is going through something like a V-shaped recovery, but we’re still well below the level we reached one year ago. Financial markets have improved, and that’s good for us, but for a lasting recovery, we need to see improvements in the real economy.

As I’ve said before, Covid news is now economic news. As soon as the economy can fully reopen, we will see much broader improvement. You can’t install drywall over Zoom.

In a few weeks we’ll get our first look at the Q1 GDP, and it could be very strong. Goldman Sachs is expecting growth of 8%. There’s talk of 10% growth. Even the Fed is optimistic, and they hate everything. Now let’s look at some numbers for Q1 earnings season.

Looking at the Numbers for Q1 Earnings Season

The Q1 earnings season will start in early- to mid-April. This is a crucial time for Wall Street. The economy has improved, and investors will want to see improved profits as well.

This is also important because Wall Street has gambled that things are getting better and will continue to get better. Right now, you may see a lot of scare items in the news media about how expensive the overall market is. Well, those valuation ratios are correct, but they’re missing the point in how unusual the current market is.

Investors are looking past the dismal numbers we’ve had. That’s why we have skyward valuations. Stock prices are forward-looking and earnings are backward looking. With such a gap between today and tomorrow, of course the valuation metrics look scary.

Actually, the Q4 earnings season was pretty good. In the S&P 500, 384 stocks beat guidance, 18 met expectations and 98 missed estimates. (No, it doesn’t add up to 500.) Regarding sales, 368 of 498 stocks beat on sales.

For Q4, the S&P 500 made $38.18 per share. That’s the index-adjusted figure. Before the pandemic hit, analysts had been expecting something close to $50 per share. Then everyone got scared. At one point, expectations fell all the way to $35 per share.

For Q1, Wall Street expects the S&P 500 to earn $38.99 per share. That’s almost exactly double last year’s Q1. If you recall, it was really the second half of Q1 (or the second eighth, if you prefer) that was impacted by the lockdowns.

The analyst community currently expects the S&P 500 to have full-year earnings of $172.43 per share. Going by today’s level, that means the S&P 500 is trading at 22.67 times this year’s expected earnings. That’s high, but it also needs to be put in context. The earnings yield (the inverse of the P/E Ratio) is 4.41%. That compares pretty favorably with the 10-year yield at 1.61%.

Going out even further, Wall Street analysts expect 2022 earnings of $200 per share. I’m leery of forecasts going out that far. Still, if a robust recovery is coming our way, I don’t believe equity prices are unreasonably high.

FactSet Earnings Preview

FactSet (FDS) is due to report its fiscal Q2 earnings report on Tuesday, March 30. The stock hasn’t done particularly well over the last several months. Shares of FDS reached their peak of $363 in August. Since then, they’ve gradually drifted lower.

For Q1, FactSet earned $2.88 per share. That beat Wall Street’s estimate of $2.75 per share. That was an improvement of 11.6% over last year’s Q1.

I was impressed with the details. Adjusted operating margin improved 0.4% to 34.3%. The key stat for FactSet is Annual Subscription Value or ASV. For its fiscal Q1, ASV plus professional services rose 5% to $1.56 billion. The company’s user count increased by 5,187 to 138,238. Annual ASV retention was greater than 95%. When expressed as a percentage of clients, annual retention was 90%.

For this year, FactSet expects earnings to range between $10.75 and $11.15 per share. (Their fiscal year ends on August 31.) That’s probably too low. The company also sees revenue coming in between $1.57 billion and $1.585 billion. FactSet expects operating margin between 32% and 33%. That’s very good, and it’s one of the key reasons why I like this stock.

Unfortunately, the company didn’t provide quarterly guidance, but Wall Street expects Q2 earnings of $2.74 per share. That sounds about right to me. There’s a decent chance the company will raise its full-year guidance.

FactSet is not a cheap stock, but it’s cheaper than it was, and its business has improved. I’m a big fan of FactSet.

Buy List Updates

Here are some updates on a few of our Buy List stocks.

First off, I had a typo in last week’s issue. Thanks to the many readers who caught this. The correct Buy Below for Danaher (DHR) is $230 per share. My apologies for the error. The shares have firmed up some recently.

Shares of Moody’s (MCO) have also been improving lately. The stock came close to touching a six-month high. I expect another solid earnings report in a few weeks. This week, I’m raising our Buy Below on Moody’s to $320 per share.

Sherwin-Williams (SHW) is due to split next week. If you own SHW, you’ll get two more shares for each one you currently own. Unfortunately, the share price will drop by two-thirds. Our Buy Below price will fall to $250 per share. The split will take effect on April 1.

I don’t write about Hershey (HSY) as much as I should, but what is there to say? They have a simple business model that works. The stock has perked up in the last few weeks, and it’s close to a new all-time high. Hershey remains a buy up to $160 per share.

That’s all for now. The stock market will be closed next Friday, April 2 for Good Friday. This is a rare day when the market is closed and most government offices are open. Despite the holiday, Friday will be jobs day. That’s when we’ll get the unemployment rate and nonfarm payrolls for March. For February, the U.S. economy created 379,000 jobs and the unemployment rate fell to 6.2%. As usual, the ADP payroll report will be due out on Wednesday. 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 March 26th, 2021 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.