CWS Market Review – July 9, 2024

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Powell Acknowledges the Danger of High Rates

There’s a classic sketch from the earlier years of Saturday Night Live. In it, Chevy Chase plays President Ford in the 1976 Presidential Debate. Chase made zero effort to look or sound like the president.

Jane Curtin plays a moderator who asks Ford a bewildering question full of facts and figures. Ford, looking overwhelmed, finally responds, “it was my understanding that there would be no math.”

I bring this up because the issue Curtin asked about involved the Humphrey-Hawkins Act, known officially as the Humphrey-Hawkins Full Employment Act. One of the mandates of the act is that the Chairman of the Federal Reserve must testify twice a year before Congress. That came today.

Jerome Powell spoke before the Senate Banking Committee; you can see his full remarks here. Usually, these speeches are usually pretty dull affairs. (One year I went down to the committee room and managed to get the seat directly behind Ben Bernanke.)

As expected, Powell discussed the improvement in inflation but stressed that we’re not yet at the Fed’s target level of 2%. He said that the FOMC thinks it’s too early to start cutting rates, and they want to see solid evidence that inflation has been defeated. Powell said that the data in Q1 did not prove such evidence, but the more recent data is leaning that way.

What was interesting about today’s remarks is that Powell also said that holding rates too high for too long could also be a problem. This is obviously true, but it’s noteworthy to hear the Fed chair acknowledge it. Specifically, Powell said “reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

These words pleased investors. In today’s trading, the S&P 500 rose for the sixth day in a row and for the ninth time in the last ten sessions. The index is on pace for its tenth weekly gain in the last 12 weeks.

It’s still been an amazing time for growth stocks. Since early 2023, the Nasdaq 100 ETF (QQQ) is up 90%. Value stocks aren’t doing poorly. Instead, they’re just floating along. Typically, when growth beats value, it’s a long, steady grind, but when value leads growth (like in 2022), it’s short and brutal.

Unemployment Rises to a 31-Month High

On Friday, the Labor Department reported that the U.S. economy added 206,000 net new jobs last month. That slightly topped expectations of 200,000. The sour note is that the jobs gains for April and May were revised downward by 111,000.

Most of the media reported that the unemployment rate rose to 4.1% which is technically correct, but I dug a little into the numbers. Working out the decimals, the unemployment rate increased to 4.054% which indeed rounds up to 4.1%.

This was the highest unemployment rate since November 2021. Over the last year, nonfarm jobs increased by 1.67%. That’s the smallest year-over-year increase since Covid.

The most important number I wanted to see was average hourly earnings, and it wasn’t bad. For June, average hourly earnings increased by 0.3%. Over the last year, average hourly earnings are up 3.9% which is just ahead of inflation. (The CPI report for June is due out later this week.) This needs to improve.

This report tells me that the economy isn’t crumbling but it appears to be slowing down. The broader U-6 rate, which includes discouraged workers, was unchanged at 7.4%. The labor force participation rate increased by 0.1% to 62.6%. The labor force participation rate for prime-working age adults (25 to 54) rose to 83.7%. That’s a 22-year high.

I’m concerned that so much of the job gains are going to healthcare and government:

Though June job creation topped expectations, it was due in large part to a 70,000 surge in government jobs. Also, health care, a consistent leader by sector, added 49,000 while social assistance contributed 34,000 and construction was up 27,000.

Several sectors saw declines, including professional and business services (-17.000) and retail (-9,000).

Long-term unemployment increased by 166,000 to 1.5 million. That’s up from 1.1 million last year. Long-term unemployed now make up over 22% of those who don’t have a job.

This report probably won’t change the Fed’s thinking. The FOMC meets again at the end of this month. Traders think there’s a 95% chance that the Fed will leave rates alone. I think that’s right.

The FOMC has said that it wants to see more hard evidence that inflation is under control. I think the Fed is fine with erring on the side of higher rates. Futures traders currently see a 72% chance that the Fed will cut in September. That appears to be the emerging conventional wisdom. Traders also expect a second rate cut before the end of the year but that’s far from certain.

The next test for the market will come this Thursday when the government releases the CPI report for June. The consensus on Wall Street is that headline inflation increased by 0.1% last month while core inflation increased by 0.2%.

Stock Focus Revisit: UFP Technologies

In February 2023, I told you about UFP Technologies (UFPT). The shares are up 168% since then.

I wish I could tell you that I told the world it was an amazing buy. Instead, I merely said it was an interesting stock and that the valuation was reasonable. Sometimes, that’s all you need.

At the time, UFPT had two analysts who followed the stock. That’s now up to three. You’d think a stock like this would get some more attention. Since early 2002, UFPT is up close to 40,000%.

So, what do they do? From the company:

UFP Technologies is a designer and custom manufacturer of comprehensive solutions for medical devices, sterile packaging, and other highly engineered custom products. UFP is an important link in the medical device supply chain and a valued outsourcing partner to many of the top medical device manufacturers in the world. The Company’s single-use and single-patient devices and components are used in a wide range of medical devices and packaging for minimally invasive surgery, infection prevention, wound care, wearables, orthopedic soft goods, and orthopedic implants.

UFP Technologies is based in Newburyport, Massachusetts. The company has a market value of $2.3 billion and about 3,000 employees. It’s not a member of the S&P 500 but it’s in the Russell 2000. Last year, it had revenue of $400 million.

In May, the company had a blow-out earnings report, UFPT earnings were $1.64 per share compared with expectations of $1.10 per share, but I shouldn’t really call the average of three analysts a consensus. Those analysts expect UFPT to make $6.74 per share this year which gives the stock a p/e ratio of about 44. The next earnings report will probably be in early August. Expectations are for $1.53 per share.

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

– Eddy

Posted by on July 9th, 2024 at 5:39 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.