CWS Market Review – November 29, 2022
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The stock market pulled back on Monday and the selling continued into Tuesday. This comes after a string of good days before Thanksgiving. The immediate cause is most likely the uncertainty brewing in China.
We don’t have a precise picture of what’s happening in China due to the government’s strict control of the media, but it appears that there are large-scale protests against the country’s draconian Zero Covid policy.
Why is this a concern for financial markets? For one, it could again disrupt global supply chains. There are also many American companies that do a large share of their business with China. Apple is a good example. Shares of Apple fell 2.6% on Monday. That was its biggest drop in two weeks. Apple is down close to 20% this year.
Apple has a major manufacturing site in Zhengzhou. That plant could have a production shortfall this year of six million iPhone Pro units. The facility is run by Foxconn.
The plant has been a focal point of protests against the government’s heavy-handed Covid protocols. Last month, several thousand employees left the plant due to food shortages. The employees were replaced and soon the new employees began protesting the pay and quarantine practices. Once a protest like this gets started, you never know where it will go.
Foxconn is trying to get workers back on the job. The company said it will offer a bonus of 500 yuan to returning workers. That’s about $70. Also, workers can get another 3,000 yuan if they stay for 30 days, plus another bonus of 6,000 yuan in January.
This has been building for some time. The protests in China come after several months of economic pain. The unemployment rate for young people in China is close to 20%. President Xi Jinping has placed himself in a difficult spot. If Covid cases explode in China, that could hurt the economy. Yet if he continues with these policies, that could risk a major political upheaval.
In Shanghai, they had a lockdown that lasted eight weeks. That helped put the economy on the path towards its worst year for economic growth in decades.
Previously, the government said it was going to roll back some restrictions. Investors immediately celebrated and Chinese stocks soared. But soon, Covid cases started to rise, and the government reimposed the restrictions.
I’m certainly not an expert on China and the innerworkings of the CCP, but I do know that what starts out as a Covid protest can easily evolve into something more.
There was a terrible building fire in Urumqi that killed 10 people. Many of the protesters are blaming the restrictions for the death toll. Students at a university turned on their cell phone flashlights as a tribute to the victims of the fire. I won’t venture a guess as to what will happen in China, but the recent events seem to be something quite different. This could be a turning point for China, and for the world.
Preview of Friday’s Jobs Report
The jobs report is due out later this week. Wall Street expects to see a gain of just 200,000 nonfarm payrolls. That’s a fairly conservative expectation. The economy created 261,000 net new jobs for the month of October, and that was the smallest increase since December 2000. Last month, the unemployment rate was 3.7%. Wall Street expects that number to stay the same for November.
Despite multiple rate increases, we haven’t seen much damage to the labor market. Initial jobless claims have creeped up a little over the past few weeks but it’s nothing to be alarmed about. Not that long ago, initial jobless claims were the lowest we had seen in more than 50 years.
The weak spot continues to be wages. Wage growth has largely not kept pace with inflation.
Tomorrow, ADP, the payroll company, will release its payroll report. I used to follow this report closely but honestly, it wasn’t a very good report. While ADP’s report came out before the government’s report, it proved to not be a very good omen for what the Feds would say. Recently, ADP revamped their report, so we’ll see if it proves to be a better indicator for the jobs market.
Jerome Powell is scheduled to give a speech tomorrow and you can be sure that investors will closely parse every word and comma for a hint of a change in policy. The Fed meets again in two weeks, and there appears to be emerging conventional wisdom that the Fed will hike rates by only 0.5%. This comes after four consecutive meetings when the central bank increased interest rates by 0.75%.
I suspect that we’ll get a few more rate increases before the Fed pauses. In fact, the Fed could hold rates steady for much of next year. That would be good for the overall market.
As I mentioned before, the stock market had been doing quite well before this small break. Measuring from the market’s low on October 13 to the high on November 25, the S&P 500 gained 15.5%.
I should also point out that this has historically been one of the best times of the year for the stock market.
I number-crunched all 126 years of daily closings for the Dow Jones Industrial Average. That’s more than 45,000 data points.
From December 13 until January 8, the Dow has gained an average of nearly 3%. That may not sound like a lot but in terms of long averages, it’s pretty impressive. That means that more than 37% of the Dow’s total gain has come in less than one month of the year.
I don’t place a great deal of analysis on these long-term calendar effects, but I do think it’s interesting that investors have tended to be more optimistic during the holiday season.
Stock Focus: McCormick & Co.
One of the things Christopher Columbus was looking for was spices. Perhaps it shows us how important is the role that spices play in our lives. It’s also why McCormick & Company (MKC) is one of my favorite companies. It’s the largest producer of spices in the world. McCormick is a major food company that has delivered outstanding results for decades.
The company was started by Willoughby McCormick in the late 19th century. He initially sold his products door to door. A few years later, he got into the spices business.
Today, McCormick is based in Hunt Valley, Maryland and it has more than 14,000 employees around the world. The company owns several well-known brand names such as Old Bay seasoning and French’s mustard.
I also like the stability of the business. This is an underestimated character of good stocks. I like to have a good idea what the business will look like next month and next year. With some companies, that’s nearly impossible, but with McCormick, it’s quite easy. Since 1994, the shares have gained more than 20-fold.
This is an interesting time for McCormick because their business results have been below expectations. The company missed Wall Street estimates for the last two quarters. In October, McCormick reported Q3 earnings of 69 cents per share. Wall Street had been expecting 76 cents per share. The company said it continues to be impacted by supply-chain issues.
The company expects earnings this year to range between $2.63 and $2.68 per share. That implies Q4 earnings between 83 and 88 cents per share. At the current share price, that means the stock is going for more than 30 times earnings. As much as I like McCormick, the current price is too high. If the company offers bold guidance for next year, it may be worth a look.
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 Eddy Elfenbein on November 29th, 2022 at 10:27 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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