CWS Market Review – December 12, 2023

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

The Stock Market Is Closing in on an All-Time High

The bulls are in charge! On Tuesday, the S&P 500 closed at its highest level in 23 months. This was its fourth up day in a row.

The index is getting very close to its all-time high reached nearly two years ago. We’re now only about 3% away. The S&P 500 Total Return Index, which includes dividends, is extremely close to making an all-time high (about 0.03% away).

The index is up for the last six weeks in a row. It’s been 14 months since the last time the bear market made a new low. The S&P 500 is up nearly 30% from its low reached in October 2022.

I’m pleased to see that our ETF continues to do well. The AdvisorShares Focused Equity ETF (CWS) made another new all-time high on Tuesday for its net asset value.

We had a lot of news this week. On Friday, we got the latest jobs report. This morning, we got the CPI report for November. Also, the Federal Reserve started its two-day meeting today. The FOMC will release its policy statement tomorrow afternoon. Spoiler Alert: The Fed won’t make any changes to interest rates.

On Friday, the Labor Department said that the U.S. economy created 199,000 net new jobs last month. That was slightly ahead of Wall Street’s forecast for a gain of 190,000 jobs. For October, the economy added 150,000 jobs. The unemployment rate ticked down from 3.9% to 3.7%.

Here’s a look at the monthly nonfarm payrolls:

One problem for the economy is that a large amount of the new jobs are healthcare and government jobs. Manufacturing added only 28,000 jobs last month. That needs to be higher. Retail lost 38,000 jobs.

The labor force participation rate rose to 62.83%. That’s now at its highest level since Covid broke out in early 2020.

One good sign is that average hourly earnings increased by 0.4%. Wall Street had been expecting an increase of 0.3%. Over the last year, wages are up by 4%. While the wage gains have been good, much of the increase has been eaten up by inflation. Adjusted for inflation, workers’ pay increased by 0.2% last month and 0.8% in the last year.

The Labor Department also tracks a broader measure of unemployment called the U-6 rate which counts “discouraged” workers. For November, the U-6 rate fell 0.2% to 7%.

We’re not in a recession, but the economy is clearly slowing down. Most economists think the economy grew in real, annualized terms by 1% to 1.5% in Q4. The Fed is trying to engineer a “soft landing” for the economy. The goal is for inflation to dissipate but for the economy to avoid a recession.

Frankly, that’s tough to do. In the last 40 years, I’d say the only example of a soft landing was in 1994-95. I hope we can repeat it, but I’m skeptical. For now, the promise of lower rates are good for stocks. Don’t let yourself get scared out of the market.

The Inflation Numbers Aren’t So Bad

This morning, the Labor Department said that inflation increased by 0.1% in November. That’s not bad, although it was 0.1% higher than Wall Street’s forecast.

Over the last 12 months, inflation is up by 3.1%. That matched Wall Street’s expectations. Bear in mind that prices are still going up, but the rate of increase is slowing down.

There’s a curveball to this data and it’s energy prices. Last month, energy prices were down a lot. For example, gasoline prices were down 6% in November. The drop in energy prices weighed heavily on the CPI data.

That’s why we also want to look at the core rate (see above), which excludes food and energy prices. Last month, the core rate increased by 0.3%. Over the last year, core CPI is up by 4%. That was in line with estimates. The-year-over-year core rate has declined for eight months in a row, although the most recent one was very small.

A 2.3% decrease in energy prices helped keep inflation in check, as gasoline fell 6% and fuel oil was off 2.7%. Food prices increased 0.2%, boosted by a 0.4% jump in food away from home. On an annual basis, food rose 2.9% while energy was down 5.4%.

Shelter prices, which make up about one-third of the CPI weighting, increased 0.4% on the month and were up 6.5% on a 12-month basis. However, the annual rate has showed a steady decline since peaking in early 2023.

For the last several months, the Fed has sounded tough on inflation even though the central bank has backed off its rate hikes. The Fed first paused on rate hikes at its June meeting. It raised again in July, but it paused again at its last two meetings.

You can forget about a rate hike tomorrow, or one in January. There’s a good chance that the Fed will cut rates sometime in the spring. It could even come as early as March, but May or June is a safer bet. Futures traders currently think there’s a 92% chance that the Fed will cut rates by June. Traders see the Fed lowering short-term interest rates by 1.25% next year. That would be very good for stocks.

Stock Focus: Alamo Group

This week, I want to look at an interesting yet overlooked company, the Alamo Group (ALG). No, this has nothing to do with car rentals. Instead, Alamo is in the business of making farm machinery.

Before you roll your eyes at farm machinery, I’ll tell you that since its low in 2009, Alamo is up 18-fold. Despite having a market cap of $2.3 billion, Alamo is largely ignored by Wall Street. The company is followed by a grand total of three Wall Street analysts. One rates it a buy; the other two are holds. A lot of experts missed this one.

Check out this chart:

Honest question. How many of those downdrafts would have scared you? I’m sure a few would have, but every single one was reversed. So much of good investing comes down to waiting.

Alamo was founded in 1969. The company has 4,200 employees. Last year, it registered sales of $1.5 billion. For this year, sales will probably be close to $1.7 billion.

When I said that Alamo makes farm machinery, that’s not entirely fair. The company makes a wide range of products from street sweepers and snow trucks to tractor-mounted mowing equipment. Alamo divides its business into two units: industrial and vegetation. The company is based Seguin, Texas, about 35 miles from the actual Alamo.

Shares of Alamo have been rallying very well since early November when the company reported strong results for its Q3. Alamo said it made $2.91 per share which was 26 cents better than estimates. This was the eighth-straight quarter for record sales and earnings. The stock is up 21% since then.

These results calmed investors who were concerned after Alamo slightly missed its Q2 earnings. The company made $3.05 per share in Q2 which was two cents below estimates.

Prior to that, Alamo had been crushing its estimates. For last year’s Q4, Alamo made $2.44 per share. That was a 45-cent beat. Then in Q1, Alamo made $2.79 per share which was well ahead of Wall Street’s estimate of $2.12 per share.

In last month’s report, CEO Jeff Leonard was very optimistic. He said, “our strong, high quality order backlog gives us excellent forward visibility. Combined with the health of our markets, this bodes well for our performance for the remainder of this year and for the first several quarters of 2024.”

Alamo is currently trading at about 15 times next year’s earnings estimate. However, if Alamo keeps beating estimates as it had, then it’s probably going for around 12 or 13 times earnings. Alamo currently pays out a small quarterly dividend of 22 cents per share. That works out to a yield of less than 0.5%.

Alamo’s next earnings report won’t be out for two months, but I’m expecting another big beat.

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 December 12th, 2023 at 6:32 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.