CWS Market Review – May 9, 2023

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The Unemployment Rate Is at a 54-Year Low

The labor market is as strong as ever. Some folks thought we’d finally see some weakness in jobs, but that is not the case. At least, not yet. The important fact here is that it takes time for the Fed’s policies to work their way to the regular economy.

On Friday, the government reported that the U.S. economy created 253,000 net new jobs last month. That was above estimates for 180,000. The unemployment rate fell to 3.4%. If we work out the decimals, we now have the lowest jobless rate since May 1969 (although the methodology has changed).

The details of the report were pretty good. The broader U-6 rate is at 6.6%. The unemployment rate for African Americans fell to 4.7% which is the lowest since the government started tracking this data in 1972.

It’s also important to look at the workforce participation rate. The Labor Department only counts a person as being unemployed if he or she is actively looking for work. If you’ve given up looking, then you’re no long considered unemployed.

One problem with the workforce participation rate is that it can be heavily influenced by demographics. In this case, that means America’s growing ranks of retired folks. That’s why I prefer to look at the labor force participation rate for prime working-age adults (meaning ages 25 to 54). For April, that was 83.3%. That’s very close to a 21-year high. Ryan Detrick points out that prime working-age employment is also at a two-decade high.

The weak spot continues to be wages. For April, average hourly earnings rose by 0.5%. That’s not that bad, but the problem is that inflation is eating up much of those gains. Over the past year, average hourly earnings are up 4.4%. Tomorrow, the government will release its inflation data for April. I expect to see the trend of declining inflation continue.

What’s the Fed’s Next Move?

Last week, the Federal Reserve decided to raise interest rates for the tenth time this cycle, but this could be the last increase for some time. In previous policy statements, the Fed said that “some additional policy firming may be appropriate.” In last week’s statement, those words were gone.

As you know, dear reader, I’m fluent in the esoteric, jargon-laden language known as Fedspeak. Trust me, those missing words are a big deal. This time, the Fed said that it will “closely monitor incoming information and assess the implications for monetary policy.” This means they’re going to cool off for a few months.

Futures traders took the hint. The Fed meets again in mid-June and the futures prices currently show an 82% chance that the Fed will leave rates alone. For the meeting after that, the one in late July, traders see a 57% chance that rates will be left alone.

Then it gets interesting, For September, the odds are in favor of a rate cut. In other words, traders see the Fed taking back its rate hike from five months before. It’s no secret why: Wall Street is afraid of a recession. The chart above shows the spread between the two- and ten-year Treasuries. It’s been negative for 10 months. A negative spread has often been a precursor of a recession.

Earlier this week, Austan Goolsbee, the top banana at the Chicago Fed, said “I think you have to say that recession is a possibility.” I think that’s the case and financial markets are reflecting that reality.

It’s not all dreary news. One positive note is that this has been a good earnings season. Most of the numbers are in, and Wall Street has been pleasantly surprised with the resilience of corporate earnings.

Q1 Earnings Summary

Here are some numbers from FactSet. So far, 85% of companies in the S&P 500 have reported results. Of that, 79% have topped their earnings estimates. That’s above the 10-year average of 73%. (That’s right. On Wall Street, you’re expected to beat expectations.) The average “beat” has been by 7.0%. That’s also above the 10-year average of 6.4%.

At the current rate, it looks like Q1 earnings will be down about 2.2% from last year’s Q1. This would be the second quarterly decrease in a row. While earnings are down, not too long ago, Wall Street was expecting a larger drop of 6% or 7%. We may not be out of an earnings recession just yet. Wall Street currently forecasts an earnings drop of 5.7% for Q2.

In particular, strong earnings from the Tech and Healthcare sectors have aided the overall earnings environment this season.

Of the companies that have reported, 75% have beaten Wall Street’s revenue forecast. That compares favorably with the 10-year average of 63%. On average, revenues are 2.7% higher than estimates. That’s 1% higher than the 10-year average.

Revenue for Q1 2023 is on pace to be 3.9% above last year’s Q1. That would be the slowest growth rate since Q4 of 2020.

Wall Street expects to see earnings growth return later this year. As I mentioned before, earnings are expected to fall by 5.7% for Q2. For Q3, analysts expect earnings to grow by 1.2% and that will increase to 8.5% in Q4.

I should mention that Wall Street analysts have been known to be somewhat less than precise with their forecasting abilities. FactSet notes that the forward P/E Ratio for the S&P 500 is 17.7. That’s below the five-year average of 17.3.

Trex Jumps 8% on Earnings Beat

After the close on Monday, our favorite deck stock, Trex (TREX), reported very good results for Q1. The stock rallied more than 8% on Tuesday to reach a nine-month high.

I should be humble in talking about our track record with Trex. We added the stock in 2000 and it was an instant home run. Trex was the top-performing stock on our Buy List in 2000 and again in 2001.

Then came the Fed. As the central bank raised interest rates, Trex’s business plunged, and the shares followed. Last year, Trex was our worst-performing stock by far, but we held on.

That’s why Monday’s report was so important. While Trex’s business is still down from last year, the company is healthy again and it continues to deliver profits.

For Q1, Trex has sales of $239 million which was $1 million ahead of expectations. The company earned 38 cents per share which beat the Street by four cents per share.

Thanks to today’s rally, Trex is again our top-performing stock this year (+44%). Not only that, but Trex has beaten the overall market since we first added it more than three years ago, and that includes the disaster year of 2022. This is an important lesson for investors. All companies go through difficult periods, but the strong ones pill through.

“Our performance in the first quarter demonstrated the broad-based appeal of our product line and the continued attractiveness of the outdoor living category as an ongoing secular trend. Supported by our industry-leading brand, manufacturing efficiency, and the strength of our decades-long relationships with best-in-class channel partners in the industry, Trex continued to generate industry-leading margins and profitability,” said Bryan Fairbanks, President and CEO of Trex.

Now for the best news. Trex sees Q2 earnings coming in between $310 million and $320 million. That’s above Wall Street’s forecast for $309 million.

Also, Trex’s Board of Directors approved a big repurchase program of up to 10.8 million shares. That’s 10% of all the outstanding shares. This program has no expiration date.

Shares of Trex closed today up 8.15% to reach $60.89. I’m raising our Buy Below to $65 per share.

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 9th, 2023 at 6:55 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.