CWS Market Review – February 7, 2023

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Friday’s Jobs Report Signals More Rate Hikes

The stock market got a nice 1.3% bounce today. This comes after losses on Friday and Monday. Once again, High Beta stocks did the heavy lifting. The S&P 500 High Beta Index was up over 2% today while the S&P 500 Low Volatility Index was up just 0.01%.

On our Buy List, shares of Fiserv (FISV) soared more than 8.3% thanks to a good earnings report. I’ll have more details on that and on other stocks on our Buy List in Friday’s premium issue.

Last Friday, the government reported that the U.S. economy created 517,000 net new jobs in January. This was a shock to Wall Street since economists had been expecting an increase of only 187,000 jobs. The unemployment rate fell to 3.4% which is the lowest since May 1969.

While certain sectors of the economy appear weak, the labor market continues to be remarkably strong. In previous cycles, there’s been talk of “jobless recoveries.” Now we appear to be experiencing “growthless hiring.” Of course, the pace of inflation may explain some of that.

We’ve heard news recently of layoffs in the tech sector, but those job cuts apparently haven’t had a major impact on the overall numbers. Last year, nearly five million new jobs were created. That includes 260,000 new jobs in December. In the January jobs report, the so-called U-6 rate, which is a broader measure of unemployment, increased to 6.6%, but that’s still quite good.

Americans are also seeing a little better pay. Wages rose by 0.4% last month. Over the past year, wages are up by 4.4%. Unfortunately, inflation continues to eat into wage increases. According to the government, there are still 11 million job openings which is about two for every unemployed person.

In previous jobs reports, there were hints that the labor market could be slowing down. For example, temporary hiring declined, but all those signs disappeared in the January jobs report.

Looking at the details of the jobs report, leisure and hospitality jobs increased by 128,000. That was the largest advance for any sector. Business services added 82,000. Government increased by 74,000. Health care added 58,000 jobs. Retail increased by 30,000 and construction added 25,000 jobs.

Here’s the major impact of Friday’s jobs report: it complicates the job for the Federal Reserve. The Fed has steadily increased interest rates to slow down the economy, and by extension, slow down inflation. While inflation appears to be improving, the labor market isn’t cooperating.

Prior to the jobs report, futures traders had saying been that there would be one more small rate hike next month. Since the jobs report, traders now see an additional 0.25% increase in May. That would bring the Fed funds target rate to a range of 5.00% to 5.25%.

According to futures prices from late this afternoon, traders set a 91% chance of a 0.25% rate hike at the Fed’s next meeting on March 22. That sounds right. Traders also see a 72% chance of another 0.25% hike at the Fed’s May meeting. That’s up from 35% one week ago.

Fed Chairman Jerome Powell spoke today at the Economic Club of Washington. He said that the strong labor rate is a reason why the Fed thinks it faces a tough battle to defeat inflation.

I don’t think Wall Street is fully on his side. Many economists assume there’s a trade-off between employment and inflation (the Phillips Curve), but what if there’s not? Or maybe that relationship assumes other factors that may not be currently at work? We’re soon going to learn if disinflation can comfortably co-exist with a strong labor market.

Speaking of the jobs report, Powell said that it was “stronger than anyone I know expected.” Powell added, “It kind of shows you why we think this will be a process that takes a significant period of time.”

The C in FOMC stands for committee and so far, no one has broken ranks. The last policy statement was unanimous. That may soon change. Powell said, “So we think we’re going to have to do further [rate] increases, and we think we’ll have to hold policy at a restrictive level for some time.” I would not be surprised to see some Fed officials start to dissent from more rate hikes.

When the Fed updated its economic forecasts in December, not one member of the FOMC saw the Fed cutting rates sometime this year. Futures traders still think that’s a likely outcome later this year. In fact, a significant number of Fed members think short-term rates will rise above 5.25%.

One important event coming next week could tell us more about future Fed policy. Next Tuesday, the government will release the CPI report for January. A lot of folks quibble with the government’s numbers. I try to focus on the overall trend of inflation, and that’s been in the right direction. The year-over-year inflation rate has declined for the last six months in a row. I think there’s a good chance we’re going to see #7 next week.

Unfortunately, this has not been a good earnings season for Wall Street. According to the latest stats I’ve seen, half the companies in the S&P 500 have reported earnings. Of those, 70% have beaten estimates. That may sound good but it’s below the five-year average of 77%. Earnings are only 0.6% above estimates. The five-year average has been 8.6%.

For revenues, 61% of companies have beaten revenue estimates. The five-year average has been 69%. Total revenues are coming in 1.1% above estimates. For the entire earnings season, we’re on track for revenue growth of 4.3% and for an earnings decline of 5.3%.

This comes on top of pre-earnings season in which analysts already pared back their earnings estimates. In other words, companies are barely beating earnings which have already been lowered.

This may not be over. We’re now seeing analysts cut back on their estimates for Q1, and the quarter isn’t quite halfway over. Historically, the largest downward revisions come during the first month of the quarter. In January, analysts lowered their estimates by 3.3%. The consensus of Wall Street analysts is that the S&P 500 will report earnings of $52.41 per share. That’s down from $54.20 at the start of the year.

Stock Focus: UFP Technologies

Before I get to this week’s stock focus, I want to update you on some stocks we talked about recently. Two weeks ago, we looked at United States Lime & Minerals (USLM).

After the close on Friday, USLM reported very good earnings for Q4. Since no one follows the stock, I made a rough estimate for $1.60 per share. I wasn’t even close. As it turns out, US Lime made $1.90 per share for Q4, and $8 per share for the entire year.

This means the stock is going for less than 20 times trailing earnings. The shares rose 1.9% yesterday, and that’s on top of gains on Thursday and Friday. In the last five months, USLM is up 45%. It’s hard for me to believe that Wall Street continues to ignore stocks like this.

Another stock we discussed was Old Dominion Freight Line (ODFL). I highlighted the stock on January 17. I said that it was due to report earnings on February 1, and Wall Street was expecting $2.68 per share. I wrote, “I think Old Dominion can beat that.” Well, I got that one right. The company earned $2.92 per share, and the shares jumped more than 10% on the day of the earnings report. ODFL is up nearly 30% this year.

Now let’s turn to this week’s stock which is UFP Technologies (UFPT). In a little over 20 years, the stock has increased nearly 150-fold. That’s enough to turn $7,000 into over $1 million.

I’m not going to say that UFPT is completely ignored by Wall Street. A grand total of two Wall Street analysts cover the stock. UFPT is a medical devices company based in Newburyport, Massachusetts.

In its own words:

UFP Technologies is an innovative designer and custom manufacturer of components, subassemblies, products, and packaging primarily for the medical market. Utilizing highly specialized foams, films, and plastics, we convert raw materials through laminating, molding, radio frequency welding and fabricating techniques. We are diversified by also providing highly engineered solutions to customers in the aerospace & defense, automotive, consumer, electronics, and industrial markets.

UFPT’s next earnings report will probably be out in early March.

The last earnings report was very strong. For Q3, organic sales grew 21.7% and operating income increased 36.6%. Earnings rose 173% to $1.36 per share. The consensus, such as there was one, was for 94 cents per share.

CEO R. Jeffrey Bailly said, “Overall, it’s a very exciting time at UFP. We are seeing a sharp increase in customer orders, and our proactive investments to increase capacity have come online at just the right time. This, combined with the resolution of several supply chain issues, has enabled us to meet the surging demand.”

The stock is currently going for 24 times trailing earnings which is high but not excessive, especially if you consider how strong the earnings have been.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Posted by on February 7th, 2023 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.