CWS Market Review – April 16, 2024

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The stock market is finally showing some cracks. Yesterday, the Dow soared more than 400 points during the day only to close lower by 248 points. The S&P 500 slipped another 0.21% today. The index finished the day at its lowest level since February 21.

On Monday, the S&P 500 also closed below its 50-day moving average (the blue line). That snapped a streak of 110 days, which is one of the longest such streaks in the last 30 years. (In the mid-1990s, the S&P 500 was trading above its 50-DMA for more than a year.)

Dropping below the 50-DMA can be an omen for a poor or a sluggish market. Not only is Wall Street still rattled by last week’s inflation report but the escalating tensions in the Middle East are also weighing on investors.

To be frank, the recent stock market hasn’t been that volatile. The VIX, which is the volatility index, rose from less than 15 on Thursday to more than 19.5 during the day on Tuesday. It’s just that the previous five months have been unusually calm, so any change from that pattern seems unusually jarring.

We’ve gotten our first batch of Q1 earnings reports. Bank of America (BAC) said its earnings dropped 18%, and it missed estimates by one penny per share. Johnson & Johnson (JNJ) beat by seven cents per share, but the stock hit a new 52-week low. Goldman Sachs (GS) had a strong quarter as its profits rose 28%. Trump Media (DJT) lost 39% in the last week.

A few weeks ago, I mentioned how defensive stocks had been particularly weak. Today was a good example of defensive stocks doing well. In particular, staples and healthcare stocks were up the most, or in many cases, down the least.

Retail Sales Jump 0.7%

The economic news continues to be favorable. Shoppers are in a buying mood. On Monday, the Commerce Department said that retail sales rose by 0.7% last month.

That was a pleasant surprise. Wall Street had been expecting a gain of only 0.3%. Also, the number for February was revised higher to a gain of 0.9%.

This tells us that despite stubborn inflation, higher prices haven’t kept shoppers from the malls. Over the last year, retail sales increased by 4% while inflation was up by 3.5%.

If we don’t count cars, then retail sales increased by 1.1% last month. That more than doubled Wall Street’s estimates for a gain of 0.5%. It’s true that higher gasoline prices helped drive higher retail sales, but the largest increase came from online sales, which were up by 2.7%. These numbers are important to watch because consumers make up about 70% of the economy.

The Atlanta Fed’s GDP model increased its estimate for Q1 GDP growth from 2.4% to 2.9%. The model now expects real personal consumption expenditures (PCE) to rise by 3.5%. That’s quite good. The government’s initial report on Q1 GDP growth will be out on April 25. The initial report will be updated two more times.

On Tuesday, the Federal Reserve said that industrial production increased by 0.4% last month. That’s good to see because this data series hasn’t done much over the past two years. Last month, manufacturing increased by 0.5%. If we don’t count autos, then factory output was up by 0.3%.

Thanks to the positive economic news, that’s altering the markets’ take on the Fed and the course for interest rates. According to the most recent trading in the futures market, there’s a 65% chance that the Fed’s first rate cut will come in September, and there’s a 51% chance that it will be the Fed’s only rate cut this year.

Earlier today, Fed Chair Jerome Powell conceded that there’s been “a lack of further progress” with regard to inflation. Powell indicated that rate cuts may not be coming so soon. This is a noticeable change from the Fed’s stance of only a few weeks ago.

One effect of higher interest rates is that the US dollar has been getting stronger in recent days. The dollar is also being helped by increased international tensions. When investors get nervous, they go to areas of stability. According to Bloomberg, the greenback is having its best run in over a year.

Until now, investors had assumed that most of the world’s major central banks would cut rates similarly, so therefore, the impact would be negligible. Now that doesn’t appear to be the case.

Tesla to Cut 10% of its Workforce

Something on Wall Street that still surprises me is how quickly a stock can go, in Wall Street’s eyes, from doing nothing wrong to doing nothing right.

I say this in the wake of Monday’s news that Tesla (TSLA) will be laying off more than 10% of its global workforce. The electric vehicle leader is facing the reality of slower sales growth. In Q1, Tesla delivered 387,000 vehicles. That’s down 8.5% from last year.

Companies like Tesla are always a challenge for value-oriented investors because embryonic industries are often long on potential but meager with results. How can an investor properly value a stock that’s trading at 100 times trailing earnings but that could be the next Microsoft (MSFT)? It’s a tough question, and I don’t know the answer. I will concede that non-traditional companies should be valued in non-traditional ways.

That’s certainly true for Tesla, but now we’re talking about a company that’s richly valued but may not be growing so quickly. Tesla’s profit margins have consistently eroded. Tesla has also experienced several senior executives leaving the company.

Elon Musk said, “About every 5 years, we need to reorganize and streamline the company for the next phase of growth.” The last time they cut 10% of the workforce was two years ago.

You can see how badly Tesla has lagged the overall market.

Musk is apparently pushing the company hard in the direction of fully-autonomous vehicles. The goal is to unveil a robotaxi sometime this summer. Meanwhile, other car companies are scaling back their EV plans, while hybrid sales are as strong as ever.

These kinds of stocks are often referred to as lottery investments meaning that investors know that 90% of these investments will go nowhere but that a big home run will more than make up for the losses.

Let’s say that forty years ago, you decided that computers were the future. You decided to invest in what most experts believed were the top contenders in the field. That probably would have led you to invest in IBM, Cray and DEC. Lancaster Colony (LANC) would have been a far better investment. They make croutons.

My point is that even if you’re right in your thesis, you can be wrong in your delivery.

Stock Focus: IES Holdings (IESC)

As long-time readers know, one of my favorite hobbies is to highlight high-quality companies that are practically unfollowed by Wall Street. I’m often asked how to find these stocks, but that’s hard to answer because they’re, by definition, not well known.

Recently, I came across IES Holdings (IESC), which I have to confess I was unfamiliar with. I’m glad I know it now. Twelve years ago, it was going for $1.75 per share. Now it’s at $120. Still, not a single analyst covers it.

IESC has done so well that the S&P 500 looks like a flat line in comparison.

According to Wikipedia, IESC “provides infrastructure services including electrical, communications, low-voltage, network, AV, and security alarm systems to the residential, industrial and commercial markets.”

IESC isn’t some microcap. The company has 8,300 employees and a market value of $2.4 billion. The company was founded in 1997 and it’s based in Houston.

For the most recent fiscal year (ending in September), IESC made $4.71 per share. IESC’s next earnings report will probably be out in early May, but I can’t say what Wall Street’s consensus is since there isn’t one.

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 April 16th, 2024 at 6:23 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.