CWS Market Review – September 6, 2022

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The late summer stall is now turning into something substantial. In 14 trading days, the S&P 500 has given back 9.22% which is more than half of what it gained in the previous two months. As I’ve said, all bear market rallies should be assumed to be phony until proven otherwise.

On Friday, the government reported that the U.S. economy created 315,000 net new jobs last month. Perhaps the most remarkable stat from this report is that it was very close to Wall Street’s forecast of 318,000. I’m afraid Wall Street economists don’t normally have a very good track record of predicting the monthly jobs reports. Or much else.

This was the second-lowest monthly gain of the last 16 months. That’s not a reflection on August being so poor but rather on the previous 16 months being very good. In July, the economy added 526,000 jobs. In two months (March and April 2020), the U.S. economy lost 21.991 million jobs. In the 28 months since then, it has made back 22.231 million jobs. That certainly makes for an interesting chart.

Much of the media reported that the unemployment rate rose 0.2% to 3.7%. While that’s technically correct, I dug through the numbers and found that the unemployment rate rose to 3.65% which rounds up to 3.7%. Sure, it’s not a major issue, but the uptick in unemployment is nothing out of the ordinary. Part of that was driven by more people entering the workforce. The labor force participation rate increased to 62.4%.

The labor force participation rate gets a lot of attention, perhaps too much, but one issue with that number is that it’s heavily influenced by demographics. In the 1960s and 70s, that meant women entering the workforce. In recent years, it’s been the aging of the population. That’s why one key stat I like to follow is the labor force participation rate for prime working-age adults (aged 25 to 54). For August, that was 82.8%. That’s very good, and it’s nearly back to pre-pandemic levels.

One weak spot is wage growth, or lack thereof. In August, wages rose by 0.4%. Over the last 12 months, wages are up 5.6%. That’s still below the rate of inflation. We really need to see this number improve.

Another weak spot is that the number of full-time jobs fell to 242,000. Part-time jobs increased by 413,000. This jobs report had ammo for the bulls and the bears.

I should add that historically the August jobs report has been notoriously volatile. Last year, the initial estimate for August was 235,000. That was later revised higher to 483,000. If that’s the case, I have to wonder if it’s even worthwhile to release the initial estimate.

The government also lowered the June jobs number by 105,000. The number for July was lowered by 2,000.

Professional and business services led payroll gains with 68,000, followed by health care with 48,000 and retail with 44,000. Leisure and hospitality, which had been a leading sector in the pandemic-era jobs recovery, rose by just 31,000 for the month after averaging 90,000 in the previous seven months of 2022. The unemployment rate for the sector jumped to 6.1%, its highest since February.

Manufacturing rose 22,000, financial activities gained 17,000 and wholesale trade increased by 15,000.

We’re in an odd situation where the labor market is strong, yet companies are announcing layoffs. The market took the report as being “weak.” That seems off base to me, but the stock market started off Friday well; but then share prices lagged as the day wore on. Nearly the same thing happened on Tuesday.

The next test for the market will come next Tuesday when the government releases the CPI report for August. While there’s been some encouraging news regarding inflation, we still have a long way to go. The price for gasoline has been falling consistently for several weeks.

The big battle on Wall Street right now is for what the Fed will do at its meeting later this month. Some traders expect a 0.5% rate hike while others think it will be 0.75%. Thanks to Powell’s “pain” comment in Jackson Hole, the 0.75% crowd has the upper hand. Still, the jobs report gave the 0.5% hike faithful some ammo. My take is that we should listen to Powell. There’s going to be more pain ahead.

For investors, this means they should continue to focus on conservative stocks such as those you’ll find on our Buy List. In fact, we’ve been outpacing the market in recent days. This is common—our stocks will fall when the market retreats but not as much as the overall market does.

What Happened to the 60/40 Portfolio?

One of the old standbys on Wall Street is the 60/40 portfolio. This is the idea that your portfolio should be 60% in stocks and 40% in bonds.

The idea of the 60/40 portfolio is pretty simple. If stocks started to fall, then the bond market would probably rise which would cushion the blow. Conversely, if bonds started to retreat, stocks were likely to rally.

Since 1976, stocks and bonds have fallen in the same month only 15% of the time. After lots of testing, the 60/40 allocation seems to work best. That gives investors nice gains while reducing volatility.

Except for this year. This has been the annus horribilis for 60/40. It’s having its worst year since 1936.

The culprit isn’t hard to find. It’s inflation. Inflation acts like kryptonite to financial markets. This means that the two elements of the 60/40 portfolio aren’t balancing each other out. Both are down. Higher prices have caused bonds to fall. Plus, the Fed’s response to inflation has led stocks to fall.

There’s also been an important calendar effect. The stock market peaked on the first trading day of the year while many bond indexes peaked a few weeks before the end of 2021.

Another important point is that the 60/40 had a strong run in the years leading up to 2022. Even when adding in 2022, that still means the 60/40 has delivered gains close to its long run average. The 60/40 will have its day in the sun again, but that probably won’t happen until the Fed gets inflation under control again.

We’re also in the period of the year that’s historically been weak for stocks. Looking at the complete history of the Dow Jones Industrial Average, the stock market has historically hit a peak on September 6. After that, stocks retreat until October 29. Historically, the loss has averaged about 2.23%. That may not sound like much, but it stands out when compared to a 126-year average.

Tootsie Roll Is a Stock Like No Other

I used to be a big fan of Tootsie Roll. Not just the candy but the stock. I bet most people assume that Tootsie Rolls are made by Hershey or some other big-time chocolatier.

Not so. Tootsie Roll is its own company. Or to be proper, Tootsie Roll Industries. Its ticker symbol is TR. I remember it as being a classic defensive stock with a great long-term track record.

Then the oddest thing happened. Tootsie Roll disappeared. Not the candy but the stock. It became a ghost. It’s a mystery wrapped in an enigma wrapped in a Tootsie Pop.

Yet, TR still exists. It trades. It pays a small dividend. It’s even a member of the small-cap S&P 600. While some companies keep a low profile, Tootsie went full D.B. Cooper.

The crux of the matter is that a majority of Tootsie is owned by one family. No other company in the S&P 500 has that high a percentage of insider ownership, even Elon at Tesla.

Since the Gordon family owns a majority, they can pretty much do whatever they want. In this case, that means running TR as if it were a private company. The current CEO is 90-year-old Ellen Gordon who was the wife of Melvin Gordon who ran the company from 1962 until he retired shortly before his death in 2015. Before Melvin ran the company, it was headed by Ellen’s father and before that, her uncle. This is a family business.

Tootsie basically ignores the investing world. No Wall Street analyst bothers following the stock. Try calling the company. You won’t get far. They don’t do interviews or investors calls.

Then in early 2021, the improbable happened. Tootsie somehow became a meme stock. The shares nearly doubled in three days. Traders quickly lost interest and TR soon settled back where it had been.

The sad truth is that Tootsie Roll’s business hasn’t done very well in recent years. It’s been mostly flat. The company has issued 3% stock dividends each year for the last several years. (That’s effectively a 103-to-100 stock split.) Although the quarterly dividend has stayed at nine cents per share since 2015, the stock splits have increased the actual payout for long-term shareholders.

One thing going for it is name recognition. That’s very important in business. I bet Tootsie Roll has at least 95% name recognition.

The typical bull case for Tootsie is that it will eventually be bought out for a nice premium. Eh, I’m not so sure. You might have to wait a long time for that to pan out. The family seems determined to keep control.

With Tootsie, perhaps I’m being too cynical and I’m overlooking what’s really a positive story. There’s a family that’s been running their business their own way for decades and they’re determined to ignore the hordes of the investing world.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Posted by on September 6th, 2022 at 7:18 pm


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.