CWS Market Review – January 16, 2024
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Stocks Near a New High? Not Adjusting for Inflation
The S&P 500 has been getting very close to a new all-time high. This is exciting. We haven’t had a new high for more than two years. Earlier today, the index broke above 4,800, something it hasn’t done in two years. Unfortunately, we couldn’t hold on and the market closed down a bit today.
The all-time record close came on January 3, 2022, at 4,796.56. That was the first day of trading of 2022. Last Friday, the S&P 500 closed at 4,783.83. That’s less than 0.3% from a new all-time high.
Still, calling this a new all-time high is a little deceiving because we’ve had an unpleasant bout of inflation over the last two years.
Here’s a look at the S&P 500 but this time it’s divided by the Consumer Price Index, in other words, inflation:
Looking at it this way, you can see that we’re still well below the peak from two years ago. We need another 10% to reach a real new high. (To make the chart easier to read, I adjusted the index so its peak level is 100 on the chart.)
The chart above shows just how destructive inflation is to financial markets. Not only do stocks and bonds go down in value, but those values are diminished by inflation as well.
In retrospect, it’s interesting to note that stocks started to fall once inflation exceeded 7%, and stock prices didn’t rally again until inflation fell back below 7%. On Wall Street, there are plenty of sophisticated models trying to predict share prices, but a simple 7% level did the trick pretty well.
The S&P 500 reached its closing low on October 12, 2022 at 3,577.03. From head to toe, the index lost 25.4% in a little over nine months. Since then, the S&P 500 has rallied back more than 33%.
We could also add another important stat which is that the stock market has gained, on average, about 7% per year over the long pull once you include dividends and inflation. In plain English, that means the stock market needs to climb about 20% or so just to reach the long-term trend line.
Traders appear to be looking for an excuse to push the market up to a new all-time high. The latest opportunity is earnings season which started last week.
Taking a Look at Bank Earnings
There’s no official opening to earnings season. No one fires off a canon or anything, but the unofficial start came on Friday when several major banks reported their earnings. All told, the banks didn’t do very well last year.
Here’s a look at how the S&P 500 Financials ETF (XLF) did compared with the S&P 500 ETF (SPY):
See that drop in March? That’s when Silicon Valley Bank went kablooey.
To be fair, the banks handled a very difficult climate as well as you could expect. Despite the troubles, JPMorgan, Bank of America, Wells Fargo and Citigroup earned a combined $104 billion last year. That’s 11% more than 2022. At the same time, Wells Fargo, Bank of America and Citigroup together culled their workforces by a combined 17,700 in 2023.
Here’s a brief summary of some of the major earnings reports:
Bank of America (BAC) got dinged on Friday after the bank said it made 70 cents per share last quarter which was a two-cent beat.
The problem is that BAC’s revenue came in below expectations ($22.1 billion versus $23.74 billion). For the quarter, revenue was down 10%. The bank also had a pre-tax charge of $1.2 billion. Shares of BAC closed lower today for the sixth session in a row. The bank is currently going for about 10 times forward earnings.
BlackRock (BLK) had another very good quarter. These folks seem to make money in any environment. The company is the largest asset manager in the world. Last quarter, BLK made $9.66 per share while Wall Street had been expecting $8.84 per share. Revenue was $4.63 billion which matched expectations. The company now manages more than $10 trillion in assets.
Bank of New York Mellon (BK) also had a big one-time charge. That seems to be the theme this season. To be fair, many banks had to help replenish the FDIC after the regional bank troubles from last year. Excluding that, BK made $1.28 per share last quarter. That was a 15-cent beat. Revenues were up 10% to $4.31 billion. The stock got a nice 4% jump in Friday’s trading, and it hit a new 52-week high today.
Wells Fargo (WFC) made 86 cents per share but once that’s adjusted for charges, then the bank made $1.29 per share last quarter. That beat expectations by 12 cents per share. Revenue came in at $20.48 billion which was a little bit below expectations.
I like to look at net interest income which is the core of what a bank does. For last quarter, net interest income fell 5% to $12.78 billion. Wells warned that net interest income would come in lower this year. The shares pulled back after Friday’s report. I haven’t been terribly impressed by Wells recently.
JPMorgan Chase (JPM) is the Grand Poobah of banking. Its market value is close to half a trillion, so it’s worth seeing what it had to say. Also, Jamie Dimon, the CEO, is never shy about his beliefs. JPM has nearly $4 trillion in assets and a very strong balance sheet.
For Q3, JPM made $9.3 billion or $3.04 a share, but there was a big $2.9 billion payment to the FDIC. The bank said its merger business fell 18% last year. For the quarter, JPM earned $3.04 per share. That compares with Wall Street’s increase of $3.32 per share. (That may not be the exact comparison. There appears to be some uncertainty here.) JPM had revenues of $39.94 billion which was a little more than expectations of $39.78 billion.
Citigroup (C) said it lost $1.8 billion last quarter, but that’s after (you guessed it) several large charges. Clearing all that away, Citi said it made 84 cents per share last quarter. Revenues came in at $17.44 billion which was $1.3 billion below expectations. CEO Jane Fraser said the results were “very disappointing.” Citigroup also said it’s cutting 20,000 jobs.
We had a few more banks report this morning. Goldman Sachs (GS) shredded expectations. The Wall Street powerhouse said it made $5.48 per share last quarter. Expectations were for $3.51. (As with JPMorgan, there appears to be some doubt over which figure is the final profit figure.)
Last year was a tough year for many Wall Street firms as major deals dried up. That’s another effect of higher interest rates. At Goldman, investment banking fees fell 12% to $1.65 billion.
Shares of Morgan Stanley (MS) took a hit today even though its earnings report wasn’t as bad at it looks on the surface. Last quarter, Morgan made 85 cents per share where the Street was expecting $1.01 per share. The bank had quarterly revenues of $12.90 billion which beat expectations of $12.75 billion. Morgan’s investment banking revenue edged up 5% thanks to a big lift from fixed income. The stock fell 4.9% today.
PNC Financial Services (PNC) made $3.16 in Q4 compared with estimates of $2.71 per share. One year ago, PNC made $3.47 per share for last year’s Q4. The stock dropped sharply at today’s open, but it gradually made back most of what it lost. PNC’s CEO said, “We grew revenue, controlled core expenses, added to our loan portfolio and maintained strong credit metrics.”
Earnings for Our Buy List Stocks
We still don’t have all the earnings dates for our Buy List, but it looks like our first stocks to report will come next Wednesday, January 24, from Amphenol (APH) and Abbott Labs (ABT). (I’ll have more on these on Thursday for our premium subscribers.)
I’m especially looking forward to Abbott’s report. The stock is very close to breaking its 52-week high from July. A new high may come any day now.
If you’re not familiar with Abbott, check out this long-term chart:
That’s a very impressive chart. Abbott is up 38-fold in 33 years. Note also how consistent it’s been.
In October, Abbott’s Q3 report beat Wall Street’s consensus, and it narrowed its full-year guidance to a range of $4.42 to $4.46 per share. If you want to be technical, that’s an increase to the mid-point of its previous range.
Let’s do a little math. For the first three quarters of this year, Abbott made $3.25 per share. With the updated guidance, that implies Q4 earnings of $1.17 to $1.21 per share. That’s quite good. For its part, Wall Street is playing it safe and the consensus is for $1.19 per share.
Abbott is as blue chippy as they get. Last month, the company increased its dividend for the last 52 years in a row. The dividend was increased from 51 to 55 cents per share. There aren’t many companies that can boast of a track record like that. I’m looking forward to more good news from Abbott next week.
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 January 16th, 2024 at 6:36 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.
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