CWS Market Review – June 21, 2019

“Many FOMC participants now see that the case for somewhat more accommodative policy has strengthened.” – Federal Reserve Chairman Jerome Powell

That little statement above sparked a party on Wall Street. What it means, basically, is that the Fed is leaning towards cutting rates. Wall Street responded with a big rally. On Thursday, the S&P 500 closed at a brand-new all-time high.

Our Buy List also closed at an all-time high. We have a nice lead over the market as well. We’re now up over 21% on the year and 2019 isn’t even halfway done.

In this week’s CWS Market Review, we’ll take a closer look at what the Fed’s plans are. I’ll also preview next week’s earnings report from FactSet. This stock has been a rock star for us this year. It’s our #1 stock this year, with a 50% gain.

I also have some updates for our Buy Below prices. Thanks to the recent rally, our stocks keep busting past their Buy Belows. But first, let’s look at what the Fed had to say this week. Or more accurately, what they’re no longer saying.

The Fed Is Patient No More

The Federal Reserve met on Tuesday and Wednesday of this week. This was an important meeting because there’s been growing pressure on the Fed to help out the economy. The central bank decided against lowering interest rates.

Going into this meeting, there was some speculation that the Fed could surprise us with a rate cut. Alas, that didn’t happen, but the Fed appears to be more open to cutting rates in the future. In fact, one member, St. Louis Fed President James Bullard, voted to cut rates immediately.

In their policy statement, the Fed noted the overall strength in the economy. Importantly, the Fed removed a key sentence. The words “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal-funds rate may be appropriate to support these outcomes” were absent from this statement. Previously, the “patience” referred to the need to raise interest rates.

The statement contained this sentence: “The Committee continues to view sustained expansion of economic activity, strong labor-market conditions and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.” And it added: “but uncertainties about this outlook have increased.”

That’s telling. The FOMC debates these words carefully. There are clearly Fed members in addition to Bullard who want to see rates go down soon.

The Fed also released its economic projections for the coming few years. Here’s where things get interesting. Despite the market’s desire for rate cuts, a slim majority at the Fed sees no need to cut rates this year. After that, they only see one rate cut coming next year.

Wall Street is far from this view. Very far. According to the latest futures prices, a cut at next month’s meeting is a foregone conclusion. I’m not exaggerating. The futures market has the odds of a cut priced at 100%. You can’t get much more certain that that! One month ago, the odds were at 20%.

On top of that, they see the odds of a cut at the following meeting, in September, at 87%. I’m puzzled by this level of certainty. In fact, futures traders see a third rate cut coming before the end of the year.

While it’s true that the Fed appears to have shifted its stance towards being more open to rate cuts, I think the market is greatly overestimating the Fed’s willingness to cut rates once, or even a few times. Whenever there’s a disagreement between market prices and a committee of economists, it’s usually a good idea to take the market’s opinion with greater weight. This time, I’m not so sure. It’s one thing to take back a wrongheaded rate hike in December. It’s quite another to cut rates by 1% over the coming year.

For their part, the bond market is all on board for rate cuts. This week, the yield on the 10-year Treasury dipped below 2%. The yield is now back to where it was before President Trump was elected more than two-and-a-half years ago. In the last seven months, the yield has dropped 120 basis points.

What this means is that the financial markets are very concerned about the sustainability of the economy. The most interesting part of the yield curve is the area around two to three years ago. Yields here have plunged very low in anticipation of Fed rate cuts. But it appears that investors aren’t expecting a prolonged cycle of lower rates. The yield curve starts to rise again after three years out.

On Thursday, the price of gold had its best day in three years. Gold is now at a six-year high.

Wall Street seems convinced on three points: we need three or four rate cuts, the Fed will oblige us and these cuts will be successful. Frankly, I’m a doubter on all three.

What to do now? The Fed’s policy change has been very good for share prices. So far, this has been the best June for the S&P 500 since 1955. Despite my skepticism regarding the Fed’s willingness to help us out, we’ve been doing very well.

There’s been a shift in the rally. Starting in June, the low-vol sectors started to lag. This comes after a few weeks of trouncing the market. In June, tech has done well, while areas like financials have lagged. This makes sense as banks like higher interest rates.

Investors should continue to focus on high-quality stocks like those we have on our Buy List. Pay particular attention to stocks that pay nice dividends. This includes stocks like Hershey (HSY), Hormel Foods (HRL) and AFLAC (AFL). Now let’s look at a Buy List stock that recently raised its dividend for the 14th year in a row.

Look for Good Earnings Next Tuesday from FactSet

We’re now in the slow period for Buy List earnings reports. On Tuesday, June 25, FactSet (FDS) is due to report. After that, we won’t see our next earnings report until mid-July when the Q2 earnings season starts.

FactSet has been on a tear for us this year. It’s our top-performing stock, with a YTD gain of more than 50.3%. On a side note, FactSet is one of our off-cycle stocks. Their last quarter ended in May. We have one other stock on the same fiscal cycle, RPM International (RPM), but they won’t report for another month.

Business is going very well for FactSet. Three months ago, FDS reported fiscal Q2 earnings of $2.42 per share. That was nine cents better than Wall Street’s consensus. Quarterly revenue rose 5.9% to $354.9 million, and organic revenue rose 5.7%.

The key stat for FactSet is Annual Subscription Value, or ASV. In Q2, ASV rose to $1.44 billion. I was also pleased to see FactSet increase its adjusted operating margin to 33.2% from 31.4% a year ago. That’s a good sign.

As of the end of Q2, FactSet has a client count of 5,405. That’s an increase of 108. The user count increased by 6,854 to 122,063. Annual client retention is greater than 95% of ASV.

In March, FactSet also updated its financial guidance. The company expects revenue to range between $1.41 billion and $1.45 billion. They see adjusted operating margin between 31.5% and 33.5%. They see full-year earnings between $9.50 and $9.65 per share. That was an increase of five cents to the low end.

More good news came last month when FactSet raised its dividend by 12.5%. The quarterly payout increased from 64 to 72 cents per share. The stock keeps churning higher. Last week, FDS broke above $300.

The consensus on Wall Street for next week’s earnings report is $2.36 per share. Look for another beat. I’ll probably increase our Buy Below on FDS, but I want to see the earnings report first.

Buy List Updates

I have some comments on a few other stocks. This week, the Verge ran an expose on the content monitors at Facebook. It’s a disturbing story about how they have to watch graphic content on the Internet for hours on end. While the employees work at Facebook, they work for Cognizant Technology Solutions (CTSH).

I want to be clear that there are no specific allegations of wrongdoing, but it’s not a flattering story. Cognizant is wisely staying ahead of the news. The company released a statement reiterating their support for workplace safety.

This shouldn’t have any impact on the company’s financial health, but I wanted to make you aware of the latest news.

There’s not much to add after the fallout from the Raytheon (RTN)/United Technologies (UTX) deal. In Barron’s, Andrew Bary said that the deal has pulled off a rare feat: it’s upset both sets of shareholders. He’s right. If someone pulled the plug on the deal, both stocks would rally.

If there’s a silver lining, it’s that the recent dip in share price has made RTN a good value here. According to Bill Ackman, UTX is using their undervalued shares to buy us out. I don’t see a way that the merger can be called off. We’re stuck with it.

With the market’s recent surge, I want to adjust a few of our Buy Below prices. Hershey (HSY), for example, has been rallying steadily for a few weeks. Since April 24, shares of HSY are up more than 18%. The chocolatier is a good example of a defensive stock. It does best when people are scared. I’m raising our Buy Below to $145 per share.

Stryker (SYK) is now a 30% winner for us this year. This is one of the most consistent long-term winners you’ll find. The stock got up to a new 52-week high on Thursday. More good earnings news should come next month. I’m raising our Buy Below to $208 per share.

Danaher (DHR) will report its Q2 earnings in July 18. The company expects earnings to range between $1.13 and $1.16 per share. Earlier, Danaher lowered its full-year guidance from $4.75 – $4.85 per share to $4.72 – $4.80 per share. This reflects the share dilution to buy GE Biopharma. The deal should close sometime in Q4. This week, I’m raising my Buy Below on Danaher to $150 per share.

That’s all for now. Next week is the final trading week of the first half of the year. We’ll get a few important economic reports. On Tuesday, the new-home sales report comes out along with consumer confidence. On Wednesday, we’ll get the latest report on durable goods. On Thursday, the government will update the Q1 GDP numbers. The last report showed that the U.S. economy grew, in real terms, at a 3.1% clip in the first quarter. 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 June 21st, 2019 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.