CWS Market Review – February 21, 2023

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The S&P 500’s Worst Day of the Year

Wall Street has apparently re-entered one of its gloomy phases. The S&P 500 has fallen the last two weeks and today was not a good day for the bulls. The S&P 500 lost 2% today making it the worst day of the year so far.

Until recently, the market had been doing quite well. From October 12 to February 2, the S&P 500 gained more than 16%. Now that appears to be yet another of several bear-market rallies we’ve seen over the last 14 months. Today was the market’s lowest close since January 20.

It will be interesting to see if the bears can keep this downturn moving. The S&P 500 closed today below 4,000 for the first time in a month. The index is still above its 50- and 200-day moving averages, but the 50-DMA is getting close. It may seem surprising to you that the market is still up 4.1% this year because sentiment has been so negative this month.

The market’s latest drama centers around the fact that the despite the Fed’s best efforts, the U.S. economy, outside of housing, continues to do well. There’s even talk of the Fed resorting to a 0.50% rate hike at its next meeting. This isn’t the dominant view, at least not yet, but it may be gaining momentum.

Goldman Sachs said it sees the Fed hiking by another 0.75% this year, with zero rate cuts until 2024. We’ll learn more tomorrow when the Fed releases the minutes from its last meeting.

Earlier today, Walmart released a very good earnings report. Walmart is so big that its earnings report is effectively like a report on American consumer behavior. The company said that December was its best sales month in its history. For the quarter, Walmart made $1.71 per share. That was 20 cents more than expectations.

For the quarter, Walmart had sales of $164 billion. That’s a gigantic number and it’s up 7.3% from the same quarter one year before. Despite the good news from the quarter that just ended, Walmart gave a muted forecast for this year. The company warned investors that consumers are getting more cautious. Americans are starting to pull back as they feel the impact of higher prices. The CFO said, “prices are still high and there is considerable pressure on the consumer.”

Until now, most of the fallout from the rate hikes has fallen on the housing market, and not so much on consumers. That might be changing.

Walmart wasn’t alone. Today Home Depot cautioned that this year might not be as strong as they had hoped. Of course, there’s a key difference with Home Depot because its business is closely tied to the housing cycle, and higher mortgage rates have severely impeded the housing market.

Shares of Lowe’s also took a hit today. That’s common on Wall Street. Traders assume that if one company in an industry is having issues, then they all are. On our Buy List, Trex fell over 6% today. The deck company will report earnings this coming Monday. Even with today’s drop, Trex is still our top-performing stock this year.

Morgan Stanley said that the stock market “could” drop by 26% in the first half of this year. These pronouncements always make me smile since the word “could” is doing an awful lot of work. Sure, many things could happen, but what’s likely to happen? Also, it’s 26%. Not 25% or 27%, but 26%. I appreciate the specificity.

Morgan contends that that the risk-reward ratio has turned against stocks. That makes sense since short-term rates have increased. The one-year Treasury yield closed today at 5.07%. In May 2021, it was yielding 0.04%.

For some investors, it will be tempting to sit out of the market and earn an easy 5% for one year. That’s not me, but I understand the feeling. Higher rates become stiff competition for stocks, and prices will adjust. That explains a lot of what happened today. And yet, housing continues to be a mess.

Today’s Terrible Housing Report

Today we got the home sales report for January, and it was ugly. U.S. home sales fell for the 12th month in a row. CNN said it “was the weakest home sales activity since 2010.”

The data for single-family homes goes back to 1968, and this is the longest streak in declining home sales on record. According to the National Association of Realtors, sales of existing homes fell 36.9% over the last year.

The annualized rate of new home sales fell from over six million one year ago to four million last month. The average rate for a fixed-year mortgage has nearly doubled from around 3.5% to over 6%.

It’s as if the Fed wants to throw a net around consumers but it keeps catching the housing market instead.

Despite the lower home sales, home prices are still going up. In January, the median home price was $359,000. While that’s down from the peak of $413,800 in June, it’s still up 1.3% over last year. That’s the lowest year-over-year change in more than ten years.

It’s a buyer’s market. Last month, the average home spent 33 days on the market. That compares with 19 one year ago. As bad as housing is, I suspect it may finally turn before the end of this year.

Stock Focus: Illinois Tool Works

I like to reserve this space for stocks you may not have heard of. My goal is to show investors that there are lots of great stocks to buy once you leave the area where the popular stocks and cool kids hang out.

This week’s focus is on a very big company that’s still not well-known. Illinois Tool Works (ITW) has 46,000 employees and a market cap of $71 billion which makes it a large-cap stock. It’s odd to call a company like this “little known,” but that seems to be the case. On Wall Street, 18 analysts cover ITW. I’m a sucker for any company with an old-fashioned sounding name.

Illinois Tool Works is based in Glenview, Illinois. The company describes itself as “a Fortune 200 global multi-industrial manufacturing leader with revenues totaling $15.9 billion in 2022. The company’s seven industry-leading segments leverage the unique ITW Business Model to drive solid growth with best-in-class margins and returns in markets where highly innovative, customer-focused solutions are required.”

Since 1990, the shares are up 88-fold. Check out this long-term chart:

Last August, ITW increased its dividend for the 51st year in a row.

Earlier this month, ITW reported Q4 earnings of $2.95 per share. That beat Wall Street’s forecast by 37 cents per share. The stock gapped up 4.6% after the earnings report came out, but it’s given the entire gain back since then.

ITW is a classic cyclical stock which means its fortunes are closely tied to where we are in the economic cycle. These are the kinds of stocks that have suffered lately, especially today. Contrast that with Hershey, one of our Buy List stocks, which is a classic non-cyclical. HSY was one of 36 stocks in the S&P 500 to close higher today.

For all of last year, ITW made $9.77 per share. For the current year, the company expects earnings between $9.40 and $9.80 per share. That gives the stock a P/E Ratio of 24 to 25 which is on the rich side. This is the kind of stock to buy just before the economy hits bottom. That means when the Fed is already cutting rates instead of what we’re seeing now.

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 21st, 2023 at 7:21 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.