CWS Market Review – December 5, 2023

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Coming Soon: The 2024 Buy List

Before I begin, I have a special announcement. Circle your calendars for Monday, December 25, 2023.

This year, December 25 is a very important day that millions of people look forward to. That’s the day I’ll unveil the 2024 Buy List. In honor of our new Buy List, the New York Stock Exchange will be closed that day. I’m deeply honored by this recognition.

I always announce the new Buy List a few days before the end of the year so no one can claim I’m somehow messing with the pricing.

I’m going to add five new stocks and sell six current stocks. We got an extra stock in the portfolio this year when Danaher spun off Veralto. We’ll bring the Buy List back down to its normal size of 25 stocks.

The new Buy List will go into effect on January 2 which will be the first trading day of next year. For track record purposes, the “buy price” of each stock will be the closing price from December 29 which is the final day of trading for this year.

All the stocks will be equally weighted based on the end of the year’s closing price. This will be the 19th year that I’ve made our Buy List public.

Our ETF, the AdvisorShares Focused Equity ETF (CWS) is based off the Buy List, and we try to make the fund track our Buy List as close as we can.

Speaking of our Buy List, yesterday we had a very good earnings report from Science Applications International (SAIC). The company is an important IT resource for the federal government, especially the Department of Defense.

SAIC beat Wall Street’s earnings forecast by more than 30%. The company also raised its full-year guidance for the third time this year. Yesterday, the stock jumped more than 13% for us. I’ll have more details in this week’s premium newsletter. You can sign up for the premium letter here.

Is the Labor Market Starting to Crack?

On Friday, the S&P 500 closed at 4,594.63 which finally exceeded its high from July 31st.

There’s some unusual symmetry at work. The first trading day in December surpassed the peak from the last day of trading in July. Now the next-highest peak came on the second-to-last day in March 2022. We’re still below the all-time peak which came on the first day of trading in 2022.

This week is Jobs Week. Tomorrow, we’ll get the ADP private payroll report. Then on Thursday, the government will release the latest report on jobless claims. That leads us up to Friday when we’ll get the official jobs report for November.

Until now, the labor market had been the solid base of the economy. As the housing market started to feel the heat of higher mortgage rates, we’ve still seen robust hiring. That may be changing.

This morning, we got the JOLTS report for October. That stands for Job Openings and Labor Turnover Survey. According to the JOLTS report, job openings dropped to a 2-1/2 year low in October.

The number of job openings fell by 617,000 to 8.72 million. That was below Wall Street’s expectations for 9.4 million. There are now 1.3 job openings for each available worker. Not that long ago, the ratio was 2-to-1.

Interestingly, the “quits rate” didn’t change much. That’s an important number to watch because it’s a good barometer of how easy it is to change jobs. Or more precisely, how easy workers think it will be to change jobs.

During the pandemic, the quits rate got to 3%. You probably remember a lot of talk of the Great Resignation. Now the quits rate is down to 2.3%. Workers have quit quitting.

CNBC noted that “the biggest sector decline was education and health services (-238,000), followed by financial activities (-217,000), leisure and hospitality (-136,000), and retail (-102,000).”

On Friday, the ISM Manufacturing Index came in at 46.7. Any number below 50 means that the factory sector of the economy is contracting. This was the 13th month in a row that the ISM was below 50. That’s the longest streak in more than 20 years. Generally, recessions have been aligned with ISM readings below 45.

For Friday’s jobs report, Wall Street expects to see a gain of 190,000 net new jobs. That would be an increase over October’s sluggish gain of 150,000, but as important as any jobs gain is, I’ll be curious to see any wage gains. Unfortunately, inflation has taken a big bite out of wage gains.

The unemployment rate for October was 3.9%. If the rate for November is 4.3% or higher, that would trigger the “Sahm Rule,” meaning that the U.S. economy would be in a recession.

I discussed the Sahm Rule a few weeks ago. It’s a simple rule to see if the economy is in a recession or not. The Sahm Rule is easy to calculate. It says we’re in a recession when the rolling three-month average for unemployment is 0.5% or more higher than the rolling three-month low over the last 12 months.

I doubt that unemployment will rise that much, but it’s not unthinkable. This news is taking a lot of heat off the Federal Reserve. The Fed meets again next week, and you can dismiss any idea that the Fed will hike interest rates. In fact, you can dismiss the idea for this week and the following meeting next month.

Futures traders are indicating that there’s a 65% chance of the Fed slashing interest rates by 0.25% in March. A weak jobs report might increase those odds.

I like to follow the Treasury yield curve and see what maturity is the highest-yielding one. These tend to go in cycles, from longest maturity to shortest and back again. This is a good way of spotting the peak in the interest-rate cycle.

Lately, the highest-yielding maturity has been in the very near term. From late August through October, the highest-yielding maturity was the four-month Treasury. Then, through most of November, it was the two-month Treasury. For the last few days, it’s been the one-month Treasury. The current yield for the one-month bill is around 5.5%.

Notice in this chart how the one-month Treasury (the black line) is now higher-yielding than both the one-year (blue) and five-year (green) notes. In fact, there’s a noticeably growing gap between the black and blue lines.

That growing spread is the bond market’s way of telling the Fed to knock it off. The market currently thinks there’s a good chance that interest rates will be more than 1% lower by this time next year. That would be very good news for investors.

Friday’s jobs report will tell us a lot. Next Tuesday, we’ll get the CPI data for November. There’s a good chance the S&P 500 will make a new all-time high before the end of the year.

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 December 5th, 2023 at 6:32 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.