CWS Market Review – February 28, 2023

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The Market’s Cold February Comes to an End

The month of February has come to an end, and I, for one, won’t miss it. Wall Street was squeezed by a lackluster earnings season and stubborn inflation. That’s a bad combo for stock prices. Apparently, the bulls saw their shadows and scurried off. Indeed, the S&P 500 lost just over 2.6% during February.

According to Bloomberg, Q4 earnings “were 0.1% below Wall Street’s forecast at the start of earnings season.” That’s very bad. Before the pandemic, companies had beaten forecasts by an average of 3.7%. Versus expectations, this has been on of the worst earnings seasons in years.

There are, however, reasons for optimism. My friend Gary Alexander points out that over the last 20 years, the stock market has done better in the three months from March through June than in the other nine months combined. We also shouldn’t forget that the stock market is still positive by 3.4% for the year.

The big market story for February is that we thought the Federal Reserve was close to the end of its interest-rate hiking. Now that appears not to be the case.

How much higher will rates go? Well, that’s still a mystery, but I suspect it won’t be too much longer. Make no mistake: the end of rate hikes will lift a major weight from the back of the stock market. There are few things bulls like better than the Fed slashing short-term rates. Some folks think we’ll see that before the end of the year.

The other big market story for February was the brief rotation away from high-risk stocks. Those sectors got off to a fiery start this year, but that trend got tripped up in February.

Investors need to understand that these two stories are related. The stock market has grown more conservative exactly as it has feared a more aggressive Fed. That’s one of the major reasons why our Buy List did so well against the stock market last year, and we’re beating the market again this year.

Inflation Is Still a Big Problem

Let’s break down some of the recent economic data. Last Thursday, the Commerce Department said that the U.S. economy grew, in real terms, at an annualized rate of 2.7% in the final three months of 2022. That’s a downgrade from the initial report which said that the economy grew at a 2.9% rate. For comparison, the economy grew by 3.2% in the third quarter.

While those numbers aren’t great, they’re not that bad. At least it’s not a recession. The first two months of last year showed negative economic growth—the economy receded, but that was more due to technical reasons rather than a broad slow down. There hasn’t been a recession yet, but that may soon change.

What can we expect for Q1? We’re already two-thirds of the way through Q1. Bank of America said it expects real growth of 1.3%. Goldman Sachs is a little more optimistic. They expect growth of 1.8%. The Atlanta Fed’s GDPNow model is the most bullish. Their model currently expects Q1 growth of 2.7%.

I have to stress that the economic data can often be confusing, and it seems to point in several directions at once. I’ve often been a guest on financial news shows and I’m afraid I don’t come off well. The producers want to have a bull line up with a bear and have them duke it out. It makes for great TV. Instead, they get me, and I’ll say something like, “Well, it’s hard to say at this point, and there are several conflicting trends at once.” That’s awful TV.

Back to the economy. The day after the GDP report comes out, the Commerce Department releases the numbers for the Personal Consumption Price index. This is important to watch because it’s the preferred inflation measurement for the Federal Reserve.

That data showed that inflation rose by 0.6% in January which means inflation accelerated from a 0.2% increase for December. The 12-month rate increased from 5.3% ending in December to 5.4% for the 12 months ending in January.

The core PCE rate rose by 0.6% in January and by 4.7% for the 12 months ending in January. Wall Street had been expecting a 12-month rate of 4.3%.

Wall Street, and the bond market in particular, did not take these numbers well. On Monday, the yield on the six-month Treasury got to 5.18%. For context, at one point in June 2021, the six-month bill was yielding just 0.02%.

The futures market now expects the Fed to increase rates by 0.25% at its next three meetings (March 22, May 3 and June 14). After that, traders expect the Fed to pause until the end of the year.

The labor market continues to be very strong. The last jobs report showed an unemployment rate of 3.4%. That’s the lowest in 53 years. Labor force participation has improved, but I’d like to see it climb higher. Initial jobless claims are down to 192,000. That’s quite good. That data series has trended lower since November.

The next jobs report won’t be out until the second Friday of the month which will be March 10.

On Friday, the Census Bureau said that new single-family home sales came in at an annualized rate of 670,000. That’s down 19% over the last year but it’s up 7% over December.

Over the last year, the average home price is down 5.3% but the median price is down just 0.7%. That suggests that the higher-priced homes are feeling the largest impact.

On Monday, we got the report on pending home sales. The National Association of Realtors said that pending home sales rose by 8.1% last month. That’s the largest increase since June 2020. Some of the increase is due to lower mortgage rates at the end of last year. Even with the increase, over the past year, pending sales are down more than 24%. From Bloomberg, “The jump beat all estimates in a Bloomberg survey of economists, which called for a 1% advance.”

On Monday morning, we got the report on orders for durable goods. The headline number was very bad. Orders for durable goods plunged by 4.5%, but that drop was almost all due to Boeing. In December, Boeing got a surge in orders, so that led to a slow January.

Airplane orders can be very volatile. If we exclude transportation, then orders were up by 0.7%.

From MarketWatch:

More important, business investment climbed 0.8% to mark the fastest gain since last August. Investment had declined in three of the last four months of 2022.

Still, the annual rate of growth in business investment slowed again to 4.3% from 5% — less than half the pace compared with one year ago.

These orders exclude military spending and the auto and aerospace industries.

The odds are low that the economy will avoid a recession this year, but it looks like those odds are rising. Now let’s look at a little-known stock that has proved to be a winner in good times and bad.

Stock Focus Amphenol Corporation

Last week, we looked at Illinois Tool Works (ITW) which is a big company that’s done very well but it seems to get overlooked. This week, I want to look at another such company.

This week, we’re looking at Amphenol (APH). Over the last 30 years, APH is up an amazing 326-fold. That’s more than 21% per year.

Despite its success, Amphenol doesn’t seem to get much attention. The stock is rarely mentioned in the media. Last year, it had sales of $12.6 billion. The name Amphenol comes from the company’s original name which was the American Phenolic Corporation. The company was founded by Arthur J. Schmitt in 1932.

Schmitt found that “insulating plastic could effectively be used to produce tube sockets in a quicker and simpler method than using Bakelite or ceramic.” The company made military equipment and radios during World War II.

Today, the company is a major producer of electronic and fiber optic connectors, cable and interconnect systems such as coaxial cables. Amphenol is based Wallingford, Connecticut and has 91,000 employees.

On January 25, Amphenol reported Q4 earnings of 78 cents per share. That beat estimates by three cents per share. For 2022, Amphenol made $3.00 per share. That’s up from $2.48 per share in 2021.

For Q1, Amphenol expects to fall by 2% to 4% to a range of $2.84 to $2.9 billion. Amphenol sees earnings between 65 and 67 cents per share.

For this year, Wall Street expects earnings of $2.99 per share, and it sees $3.30 per share for 2024. That gives the stock a decent valuation of 23.5 times next year’s estimate. Ideally, I’d like to see APH a little cheaper, but this is one of the most consistent stocks around.

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 28th, 2023 at 5:07 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.