CWS Market Review – February 27, 2024

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LUNR Falls Back to Earth

I feel terrible for the company Intuitive Machines (LUNR). This was the team that flew its craft, named Odysseus, to the moon and landed it on the lunar surface. This was the first time Americans had done so in over 50 years.

There was, however, one small problem. Odysseus landed on its side. That wasn’t supposed to happen. In my opinion, who cares?! They effectively landed a Roomba on another planet. Dear lord, that’s amazing!

So what if they got some minor details wrong? They got the first 99.999999% of the mission right. Odysseus is the first privately-built craft in history to make a soft landing on the moon.

Mind you, Odysseus is still working fine. It’s even been able to send back incredible photos. It’s just lying on its side. I mean, Odysseus is chillin’. Who cares?

Well, the markets, apparently. On Monday, shares of Intuitive Machines plunged 35%. At one point today, LUNR was down another 20%. The market gods can be a cruel bunch.

This is, however, an important lesson for investors. The stock market is not swayed by emotion. No matter how much you may wish for something to happen, the market simply doesn’t care. After all, shares of LUNR jumped 530% between the stock’s January low and its February high. The company had initially reported that the landing went well. Only when the evidence became clear did they say there was a problem.

I’m on LUNR’s side. Not enough to be an investor, but certainly enough to be a fan. This is a good reminder that a near-term share-price move isn’t the end of the world. Or even the moon.

Durable Goods Plunge the Most in Four Years

This morning, the Commerce Department released the durable goods report for January, and it was pretty bleak.

Last month, orders for durable goods fell by 6.1%. That was even below Wall Street’s already pessimistic forecast for a drop of 4.5%. This was the biggest drop in nearly four years, and that report came during the initial stages of Covid.

When we say durable goods, we mean things that are intended to last more than three years. This data can be a good omen for future economic growth. People tend to buy durable goods when they’re optimistic. That’s why today’s report is so concerning.

The data for December was revised lower to a drop of 0.3%. The initial report had been for it to remain unchanged. These reports may suggest that the economy is downshifting from robust growth towards the end of last year.

A major factor for the lousy report is a 59% drop in in civilian aircraft orders. According to MarketWatch, “Boeing reported on its website that it had received only three orders for commercial aircraft in January, sharply down from 371 in December.”

Overall transportation orders dropped 16.2% last month after slipping 0.6% in December. Orders for motor vehicles and parts fell 0.4%. Excluding transportation, durable goods orders fell 0.3% last month after dipping 0.1% in December.

There were decreases in orders of primary and fabricated metals. Machinery orders were unchanged. But orders for computers and electronic products increased 1.4%, while those for electrical equipment, appliances and components rose 0.9%.

Economists like to look at “core capital goods” which is non-defense capital goods minus aircraft orders. That’s considered to be a good proxy for business spending. For February, it edged up by 0.1%. For January, it was down by 0.6%.

There’s been a lot of talk about “seasonality effects” or the impact of weather or the news of large-scale layoffs. For example, Google is laying off 12,000 employees after reporting a profit of $20 billion for Q4. Of course, that’s what a profit-making enterprise does. We’ll need to see more data, but the economy may be slowing down right now.

Also this morning, the Conference Board said that its consumer confidence index fell to 106.7. Economists had been expecting 115. The number for January was revised lower to 110.9. This is another worrying sign.

On Monday, the Commerce Department said that sales of new homes rose in January but by less than expected. Sales of single-family homes totaled 661,000 last month (that’s an annualized figure). Wall Street had been expecting 690,000. One bright spot is that it was a 1.5% increase over December.

Meanwhile, the median sales price of new houses last month came in at $420,700, up from $413,100 in December. One problem impacting the housing market is that there’s relatively low supply. Since so many people locked in mortgages when rates were lower, they’re skittish about putting their homes on the market right now.

I don’t think the economy is in serious trouble right now, but this week’s reports do concern me. We’ll need to see more reports before we can definitely say that the economy is in trouble. The odds of no rate cut coming in June are slowly getting higher.

Tomorrow, the government will update its report on Q1 GDP growth. The initial report was quite good. On Thursday, we’ll get the PCE price data. This is the Fed’s preferred measure for inflation. Then on Friday, the ISM Manufacturing Index comes out.

Amazon Joins the Dow

Yesterday, Amazon (AMZN) joined the Dow Jones Industrial Average. This is Wall Street’s equivalent of being a “made man.”

It’s a big deal. There are only 30 stocks in the index so when one goes in, another comes out. This time, it was Walgreens Boots Alliance (WBA) that got the boot. The company recently cut its dividend and I think that prompted the index keepers to make a move.

The Dow doesn’t change its members very often. This was the first change to the Dow in nearly four years. Actually, the Dow has been getting slightly more active in recent years.

The Dow didn’t make any changes to the index from 1939 to 1956 when it replaced Loew’s Theatres with International Paper. They made four more changes in 1959 but that was it until 1976. All told, the index went 37 years with only making four changes to its roster. Since its founding in 1897, the Dow has made about 130 changes.

In 1939, the gatekeepers of the Dow removed IBM (IBM) from its index. That was a huge mistake. It was added back in 1979. Over those 40 years, IBM was a huge winner for investors. If the Dow folks had left it alone, the Dow’s level would be much higher today.

I’m not a big fan of the Dow. My preference is to follow the S&P 500, and that’s usually what I reference when I’m speaking of the market as a whole. Investors see it that way as well. Among index funds, $5.75 trillion is indexed to the S&P, but only $87 billion is indexed to the Dow.

The lack of tech stocks has hurt the Dow. In recent years, the S&P 500 (in blue) has significantly outperformed the Dow (in red).

The S&P 500 is a larger index, but the other reason is that it’s weighted by market value while the Dow is weighted by price. To calculate the Dow, you simply add up all the prices and adjust it by a multiple.

Before this week’s change, each $1 in the share price of a Dow member worked out to about 6.6 Dow points. Since Walgreens is around $20 per share, it was barely a blip in the index. It was, by far, the lowest-weighted stock in the index. Amazon is currently around $173 per share. Recall that Amazon split its stock 20-for-1 less than two years ago. (Google did a 20-for-1 a little bit after Amazon.)

There’s also the issue of Walmart splitting its stock 3-for-1. Even though nothing changes, Walmart’s weighting in the Dow will drop by two-thirds. Price weighting simply makes little sense. I understand why it was used in 1896, but not today. The Dow is an anachronism. The best index to follow is the S&P 500.

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 Eddy Elfenbein on February 27th, 2024 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.