CWS Market Review – July 3, 2020

“We hold these truths to be self-evident, that all men are created equal.” – Thomas Jefferson

The first half of 2020 is on the books, and it was certainly an eventful six months.

How’s this for serendipity? For the first quarter of the year, the S&P 500 fell by 20%, almost on the nose (-20.001%). For the second quarter, the index rallied by 20%. Again, almost on the nose (-19.953%).

So, -20% followed by +20%. Perhaps that’s fitting for the year 2020.

Unfortunately, a 20% loss followed by a 20% rebound doesn’t bring us back to 0%. It’s still a 4% loss, but that’s well within the bounds of “normal” for the stock market. If you’d checked the stock market once every six months (not a bad idea, btw), then you’d hardly think anything happened from January to June 2020.

This is an oddly quiet time for our Buy List. Earnings season doesn’t get going for another few weeks. There hasn’t been much stock-specific news for us lately. Since we’re at the midpoint of the year, in this issue, I want to take the opportunity to summarize the Buy List’s performance so far. I’ll also discuss some stocks that might be candidates for next year’s Buy List.

But first, let’s look at the latest economic news. According to the government’s figures, the economy created 4.8 million net new jobs last month. That’s a massive gain. That’s the good news. The bad news is that we have a long, long way to go.

The U.S. Economy Created 4.8 Million Jobs in June

The stock market is closed on Friday, July 3, so we get the full three-day weekend for Independence Day. Because of that, the June jobs report came out on Thursday instead of its normal time on Friday.

Most months, the jobs report comes out after I send you the weekly newsletter. Thanks to the holiday, I got to see the report this month before our deadline.

The government said that the U.S. economy created 4.8 million jobs last month. That’s an amazing figure. It blows past any record, but it’s still only a fraction of the jobs that were lost. Economists had been expecting a gain of 2.9 million. The report said that 10 million Americans have permanently lost their job.

The unemployment rate fell 2.2% to 11.1%. That’s an encouraging drop, but to add context, the jobless rate is still higher than the peak rates of unemployment rate in 1982, 1992 or 2009. In other words, we’re down to levels that are still higher than some pretty rough times for the economy. Things are better, but there’s a long way to go.

Here’s a look at nonfarm payrolls.

Thanks to the strong jobs report, the S&P 500 closed higher on Thursday. In fact, the index closed higher each day this week.

Also on Friday, the jobless-claims report came in at 1.427 million. That’s the 15th week in a row that jobless claims have topped one million. Wall Street had been expecting 1.38 million.

On Wednesday, ADP said that private payrolls increased by 2.360 million in June. I don’t place a great deal of faith in some of these numbers. It’s not that I think anyone’s lying. Instead, the circumstances are so unusual that it’s hard to get an accurate picture of what’s really happening.

To give you an example, ADP revised the May number from a loss of 2.76 million jobs to a gain of 3.065 million. A big revision like that doesn’t exactly instill confidence. The lockdown seems to have screwed with so much economic data.

Also on Wednesday, the ISM Manufacturing Index for June came in at 52.6%. That’s up from 43.1% in May. Bear in mind that the ISM is always in relative terms. It’s only concerned with things improving or worsening, not with the overall standing. Wall Street had been expecting 49.0.

The bottom line is that the fortunes of the economy are tied to that of the coronavirus. It really is that simple. As long as states and localities can reopen, then the economy will improve. Lately, the coronavirus has been making its presence felt in regions that it had largely bypassed. The good news is that some of the early data suggests that the coronavirus is less lethal than previously believed.

My fear is that the economy will bounce back but will still be below the level it was at in February 2020. In fact, it may take years for some sectors of the economy to fully recover. After all, the U.S. didn’t fully shake off the Great Depression until World War II. The Dow didn’t take out its 1929 peak for 25 years. I’m not predicting that, but I am pointing out that the economy often grows unevenly and inconsistently.

First-Half Buy List Summary

Through Thursday, our Buy List is down 4.04% for the year. That’s not too bad, but it trails the S&P 500, which is down 3.12% for the year. (These figures don’t include dividends, but my final year-end numbers will.)

It’s frustrating to be losing to the S&P 500 because as recently as June 1, we were beating the market by nearly 2%. June was tough for our relative performance due to the big shift towards cyclical stocks.

Our big weakness is technology stocks. The tech sector is crushing the market this year, especially big tech. Amazon (AMZN), for example, is up 56% this year. When trillion-dollar companies move like that, it distorts the rest of the market.

I shouldn’t be too disappointed by trailing the index by less than 1%, but I’m very competitive by nature. Still, the 15-year track record is very much in our favor.

Now for some more details:

Trex (TREX) is our top-performing stock with a YTD gain of 41.1%. This was a great addition to the portfolio. FactSet (FDS) comes in at #2 with a gain of 25.2%. Interestingly, most of our stocks are beating the market this year (13 of 25). It’s just that the losers are weighing us down.

Eagle Bancorp (EGBN) is our biggest loser with a loss of 37.3% this year. Middleby (MIDD) is perhaps our most dramatic stock this year. At one point, MIDD was down 60% for us, but it’s rallied back 80% from its low. That’s still a big loss, but not as steep as it was. Of our four biggest losers this year, three are financial stocks (AFLAC, Eagle and Globe Life).

Per Buy List rules, at the end of each year, I add five new stocks and delete five current ones. Here are ten stocks I’m looking at for next year:

Paycom Software (PAYC)

The Trade Desk (TTD)

Colgate-Palmolive (CL)

Masimo (MASI)

Waters (WAT)

Tyler Technologies (TYL)

CAE Inc. (CAE)

Simulations Plus (SLP)

Cooper Companies (COO)

HEICO (HEI)

Next year is still six months away, so I haven’t made up my mind, but those are ones I’m seriously looking at.

That’s all for now. On Monday, the ISM Non-Manufacturing Index is due out. The job-openings report comes out on Tuesday followed by the consumer-credit report on Wednesday. Thursday means another jobless-claims report. Lastly, the wholesale-inflation report comes out next Friday. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on July 3rd, 2020 at 7:08 am


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.