CWS Market Review – October 3, 2023

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The Stock Market Continues to Drift Lower

Wall Street is still in a cranky mood, and the culprit is higher interest rates. There appears to be an emerging consensus that the Federal Reserve will hold interest rates “higher for longer.”

Wall Street doesn’t like that. Last week, the S&P 500 closed out its first losing quarter since Q3 of last year. The index continued to fall today. The S&P 500 closed at its lowest level since June. The Dow is now down for the year.

The S&P 500 has already dropped below its 50-day moving average and it’s not too far from breaking below its 200-day moving average. The index has traded above its 200-DMA without stopping for six straight months. Falling below moving averages is often an omen of bad things to come.

What’s next? All eyes are focused on Friday’s jobs report. So far, the labor market has remained calm, but any weakness could convince the bears that they’ve been right.

For August, the economy created 187,000 net new jobs. That was higher than both June and July, and the unemployment rate rose from 3.5% to 3.8%. For this Friday, Wall Street expects to see 170,000 net new jobs created for September and it expects the unemployment rate to fall to 3.7%.

However, the number I’ll be watching most closely is average hourly earnings. The consensus on Wall Street is for earnings to rise by 0.3%. Workers have been getting paid more but that’s mostly keeping with inflation. That’s probably part of the reason why we’ve seen organized labor activity recently.

I won’t make a prediction for Friday’s report, but I will note that other labor reports have been pretty good. For example, the initial jobless claims report is near a seven-month low. On Tuesday, the Bureau of Labor Statistics said that job openings increased in August from 8.9 million to 9.6 million.

I was also impressed by Monday’s ISM Manufacturing Index. This report comes out on the first business day of the month. Monday’s report came in at 49.0. Any number above 50 means the factory sector of the economy is growing, and any number below 50 means it’s contracting.

This was the 11th month in a row of contraction, but it wasn’t by much. Monday’s report was the highest in 10 months.

Despite those selected positive notes, Wall Street seems to be very worried.

As grumpy as the stock market has been, the bond market is even grumpier. On Tuesday, the yield on the 10-year Treasury reached its highest level since 2007.

The yield on the 10-year got as high as 4.781% while the 30-year reached 4.874%, also the highest since 2007. A little over three years ago, the 10-year yield was going for just 0.5%.

Rising interest rates are bad for stocks for two major reasons. One is that interest expense is an important part of a company’s income statement. If it costs more to borrow money, companies will do less of it. It also costs more to refinance existing debt.

The other reason is that higher yields provide stronger competition for investors’ money. The one-year Treasury is going for 5.5%. Sure, it’s not for me, but I certainly can understand investors who’d prefer to make an easy 5.5% for one year than deal with the frenzy of stock market volatility. That 5.5% works out to more than 1,800 Dow points over the coming year, and it’s basically risk-free. What we want to look at isn’t so much the absolute level of interest rates but rather, their direction. Lower yields are good for stocks and higher yields are dangerous.

What’s interesting is that “real” yields, meaning after inflation, are rising as well. Since May 11, the yield on the 10-year TIPs, the inflation-adjusted security, has increased by 1%. It’s not just an inflation story (but that is a big problem).

The two-year yield is often considered to be the maturity that is most sensitive to the Fed’s interest-rate policy. The two-year yield recently rose to 5.129%.

The Federal Reserve doesn’t meet for another month, but the interest rate “hawks” have gotten a little stronger. The futures market still indicates that the Fed will pause at its next meeting, but the dissenters are growing. One week ago, the odds of a 0.25% rate hike in November were just 16%. Now they’re at 30%.

This week, Raphael Bostic, head of the Atlanta Fed, said he can see interest rates at the current range of 5.25% to 5.5% well into next year.

He’s not alone. Loretta Mester, the president of the Cleveland Fed, said rates could be held higher “for some time.” The next CPI report will be out on Thursday, October 12.

I’ve also been struck by how many conservative stocks have been getting squeezed by this market. For example, utility stocks are lagging badly. Check out this chart of the S&P 500 versus the S&P 500 Utility ETF:

Related to this is that growth stocks have been holding up much better than value stocks have this year. I’m not sure that can last for much longer. If the broader economy starts to get shaky, that will help the relative performance of many defensive stocks.

The Boring Stock Portfolio

In his book, One Up on Wall Street, Peter Lynch extolled the virtues of investing in boring stocks. There are many stocks that are very good businesses, but they really don’t do anything interesting. As such, investors tend to overlook them.

Just because the sector isn’t interesting doesn’t mean it’s not important, or unprofitable. These are companies that are rarely mentioned on TV.

There’s a group of boring stocks that I like to follow. Here’s a sample of some good but very dull stocks.

American Water Works (AWK) is a nice, dull stock. AWK is a public utility that provides water to 1,700 communities across 24 states. Water is a good business to be in. No town wants to be another Flint, Michigan water disaster.

American Water “owns 80 surface water treatment plants, 480 groundwater treatment plants, 160 wastewater treatment plants, 52,500 miles of pipes, 1,100 groundwater wells, 1,700 pumping stations, 1,300 water storage facilities, and 76 dams.”

Amphenol (APH) is a former Buy List stock. The company makes electronic and fiber optic connectors. Bor-ing. Over the last 31 years, it’s up more than 42,000%.

Many people assume that Clorox (CLX) is a brand that’s owned by some larger multinational. No so. Clorox owns Clorox. The company also owns Pine-Sol and Liquid-Plumr. Clorox was founded in 1913.

Cummins (CMI) is an engine company but it’s so much more. The company makes diesel and natural gas engines, plus electric and hybrid powertrains. It’s also engaged in filtration and power generation. Cummins employs more than 70,000 people around the world.

Donaldson (DCI) is a filtration company. It makes air filters for several different sectors. Another former Buy List stock.

Eaton (ETN) is a power management company that’s based in Dublin, Ireland. The company has been listed on the NYSE for 100 years. Only 32 companies have been listed that long.

Graco (GGG) makes fluid-handling systems. Snore. Over the last 30 years, it’s only up 20,000%.

Illinois Tool Works (ITW) “produces engineered fasteners and components, equipment and consumable systems, and specialty products.” Yes, it’s based in Illinois.

Public Storage (PSA) is the largest self-storage real estate investment trust (REIT) in the United States. There are currently more than 2,600 Public Storage locations around the world. PSA has relatively few employees. The lots are automated so customers can access their units at any time.

The company does a lot more than just provide the space. They also provide a broad range of services for their clients. PSA offers insurance and packing products. The company also had a subsidiary that provides boxes and truck rentals.

Sysco (SYY) is a major supplier to restaurants and dining facilities. The company has 600,000 clients.

WD-40 (WDFC) is like Clorox. Many people assume it’s a brand owned by a larger company. Nope, WD-40 is owned by WD-40.

Most every homeowner is familiar with WD-40. The lubricant spray is instantly recognizable by its yellow and blue label. Some folks at the firm were working on a Water Displacement formula. The first 39 tries failed, but #40 worked and the name was born.

Did you know WD-40 can soften leather? It can also clean tile and erase crayon. It can even unstick Legos.

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 on October 3rd, 2023 at 7:41 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.