CWS Market Review – May 23, 2023

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The S&P 500 Briefly Breaks Above 4,200

Wall Street continues to be surprisingly serene. Despite some scary headlines such as the endless debt ceiling debate or a looming recession, stock prices are holding up fairly well.

Last Thursday, the S&P 500 closed at a nine-month high. The index got above that level during the day on Friday and again on Monday but wasn’t able to close at another new high. Today, the market lost a little over 1%.

In this week’s issue, I want to focus on one of the non-traditional ways of looking at the economy which is through corporate earnings reports.

Last week, we discussed Home Depot and its less-than-stellar outlook. This week, we’re going to look at Lowe’s and what that means for the economy. Incidentally, Lowe’s and Home Depot aren’t the only retailers who are offering reduced guidance. Target and Walmart have also cautioned investors over what to expect later this year.

First, though, let’s take a step back and look at the larger picture. The rally that began in October appears to still be going. Measuring for the October low, the S&P 500 is up nearly 20%. That’s a nice run for a few months; however, the index is still far from its all-time high from early last year.

Last year, we talked a lot about bear market rallies. This latest run appears to be something different from the string of head-fakes we got in 2022.

I haven’t written much on the debt ceiling debate because there’s not much to add. I prefer to steer clear of politics, and this is political theater at its most theatrical. Everyone wants to appear tough, principled and uncompromising, but at some point, sensible heads will prevail. There’s too much at risk.

This week, Treasury Secretary Janet Yellen said the U.S. government could default as early as next week. Around Washington, this is being called X-Day. Before, Yellen had said that it’s likely the U.S. government will run out of money. Now she says it’s “highly likely.”

Technically, the government hit the debt limit in January, but it’s been using “extraordinary” measures to keep things going. Secretary Yellen said that due to the volatile nature of tax payments, it’s hard to determine a precise date when we’ll run out of money. The Bipartisan Policy Center said that if Congress doesn’t act, Uncle Sam will go bust sometime between June 2 and June 13. We’ll see.

But what about the stock market? As I said before, the market’s been pretty serene lately. You’d think that if we really were in trouble, the market would be telling us. Another explanation is that the market well understands that this is all for show.

One area where you can see the impact of the debt ceiling debate is on the very short-term yields of the U.S. Treasury market. The yield on the one-month Treasury is currently around 5.7% which is comfortably above the Federal Reserve’s target rate of 5% to 5.25%. This suggests a small risk premium for lenders, especially if you have to miss a debt payment.

The two-month Treasury is much better behaved as its yield is more than 30 basis points less than the one-month Treasury. Again, perhaps the market sees all this quickly passing.

Here’s a chart which really shows you how unusual the short-term Treasury market is right now. This is the spread between the two-month and one-month Treasury bill yields. It looks like a really bad EKG:

You’ll notice that in 2020 and 2021, there was barely any reading on the spread between the two-month and one-month bills. Once the Fed started talking about hiking rates, the spread started to widen.

That makes perfect sense as the spread is like a shorthand way to bet on the Fed raising rates. Still, in 2022, the spread never got very high.

Lately, however, everything’s gotten completely chaotic. The one-month/two-month spread has jumped from negative 100 basis points to positive 150 basis points. This has happened over the course of a few days.

Even if the Fed has to delay a debt payment, I don’t see that lasting very long. That means many Americans won’t be getting paid on their fixed-income investments. That’s a voting block I would not want to upset.

For now, don’t be worried about the debt ceiling debate. The stock market isn’t worried – neither should you be.

Lowe’s Lowers Guidance

Last week, I told you about the problems at Home Depot (HD). The company posted its worst sales miss in 20 years. As I said, the Home Depot earnings report probably tells us more about the true state of the U.S. than several government reports do.

The same can be said for Lowe’s (LOW), and today we got their earnings report. For its fiscal Q1 (ending in early May), Lowe’s said that it made $3.67 per share. That was above Wall Street’s estimate of $3.44 per share. LOW’s revenue was $22.35 billion which topped estimates by $750 million. Same-store sales fell by 4.3%. That was below Wall Street’s forecast for a decline of 3.4%.

The good news is that shares of LOW closed higher today. This is a good example of a stock closing higher not because of good results but simply because Wall Street was expecting something a lot worse. As always, investing is a game of expectations.

The big takeaway is that Lowe’s lowered its guidance for the rest of this year. The company now sees sales coming in between $87 billion and $89 billion. That’s down from the previous range of $88 billion to $90 billion. Lowe’s sees same-store sales falling by 2% to 4%. The previous forecast was flat to down 2%.

Lowe’s also said that full-year earnings will range between $13.20 and $13.60 per share. That’s down from the previous forecast of $13.60 to $14.00 per share.

That means that Lowe’s is going for about 15.2 to 15.7 times this year’s earnings estimate. That’s not bad, but I would hold off from Lowe’s just yet. Earnings warnings are like cockroaches — for every one you see, there are always a few more hiding.

As an investor, I’m happy to be a little late to a good story. There’s no need in trying to be a hero by investing at the precise low. I don’t mind holding off on picking up a stock like Lowe’s until interest rates start to fall or the company raises guidance. I want to see better news from Lowe’s before I would build a position.

I should add that we got one piece of encouraging news from the housing sector today. The report on new homes sales was better-than-expected. New homes were up 4.1% in April and up 11.8% over the last year. Right now, the inventory of homes is very low.

Update on Previous Stocks

Last month, we looked at Whirlpool (WHR). This is an interesting case because conventionally, Whirlpool appears to be an inexpensive stock. Looks, however, can be deceiving.

Shortly after we profiled Whirlpool, the company released a very strong earnings report. For Q1, Wall Street had been expecting $2.28 per share. Instead, WHR earned $2.66 per share. The company also reaffirmed its guidance for earnings this year of $16 to $18 per share.

Traders hated the report. In two days, WHR lost over 8%.

The story here is that Whirlpool is working to change its entire business. The company has divested its businesses in Africa and the Middle East, but it’s not leaving Europe. Instead, Whirlpool plans to work with Arcelik, a Turkish company, to make a company that’s focused on the European market.

Whirlpool recently closed on a $3 billion acquisition of Emerson Electric’s InSinkErator business. Whirlpool has also been cutting costs. The company expects to save between $800 million and $900 million this year.

Like Lowe’s, Whirpool appears to be cheap. The dividend yield is over 5%, but it all depends on how well the company can transition itself. I’m going to continue to watch Whirpool, but, like Lowe’s, I want to see hard evidence first.

One recent winner, in addition to United States Lime & Minerals (USLM) is Hingham Institution for Savings (HIFS). On May 2, I said it was my favorite regional bank and the stock is up over 10% since then.

This has been a slow period on Wall Street but that may soon change. The Fed minutes are due out tomorrow. On Thursday, we’ll get an update on the Q1 GDP report. Then on Friday, we’ll see the latest PCE price data.

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

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on May 23rd, 2023 at 7:21 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.