CWS Market Review – May 7, 2024

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It’s still early, but so far, May is looking a lot better than April. The S&P 500 has rallied for the last four days in a row. On Tuesday, the index briefly stuck its head above 5,200. More importantly, the S&P 500 has overtaken its 50-day moving average. That comes after 15 straight days of closing below it. Still, I’m not convinced that the coast is clear.

What makes me say that? On Friday, the government reported that the U.S. economy created 175,000 net new jobs last month. That’s a decent figure but it was well below expectations. Economists had been expecting a gain of 240,000. Also, the unemployment rate ticked up to 3.9%. That’s still low, but it’s the highest in over two years.

Oddly enough, the immediate impact of the jobs report has been positive—not because it’s good news itself but because it could push forward the Fed’s plans to cut rates, and that would be good for the market.

In other words, bad news is good news because it may spur the Fed to action. I realize that may sound odd, but welcome to Planet Wall Street.

In the jobs report, I was particularly disappointed to see that average hourly earnings increased by only 0.2% for April. That needs to improve. Over the past year, average hourly earnings are up 3.9%. Both numbers were 0.1% below expectations. These are crucial numbers for Wall Street because it may signal that consumers are close to being tapped out.

Here’s a look at the year-over-year increase in average hourly earnings. Notice how it’s increased but the rate of increase has consistently fallen.

The government also calculates a broader unemployment rate, called the U-6 rate, which includes “discouraged” workers. For April, the U-6 rate rose to 7.4% which is the highest since November 2021. The labor force participation rate stayed the same at 62.7%.

We’re also seeing more part-time workers shift to fulltime. Last month, the number of fulltime workers increased by 949,000 while part-time workers dropped by 914,000.

Here are some details about jobs growth in different sectors:

Consistent with recent trends, health care led job creation, with a 56,000 increase.

Other sectors showing significant rises included social assistance (31,000), transportation and warehousing (22,000), and retail (20,000). Construction added 9,000 positions while government, which had shown solid gains in recent months, was up just 8,000 after averaging 55,000 over the previous 12 months.

The recent gains had been heavily tilted to government and healthcare jobs. I’d like to see those gains broaden out.

Moses Sternstein points out that the jobs market isn’t so much growing as it’s “closing in the gaps.” The number of jobs that need to be done has stayed roughly the same but the number of people available to fill those jobs has been fewer than expected. As a result, job gains are modest while the unemployment rate is low. One effect of this has been higher wages for low-end workers.

That’s part of the reason why we’ve seen an imbalance in inflation. Services like haircuts have been hit hard by inflation while goods like new TVs haven’t moved that much. It all comes down to how much the product is dependent on labor costs.

So where does this put the Fed? That’s hard to say, but the futures market now thinks the first Fed rate cut will come in September. Prior to the jobs report, we were looking at a cut in November. There’s also a slight chance of another rate cut before the end of the year. Any rate cuts are good for stocks and that’s probably why the market has rallied the last few days.

We’re still in Q1 earnings season. Overall, the results have been quite good but only relative to expectations. Q1 earnings growth is currently tracking at 5.31%. That’s up from 2.99% one month ago.

So far, 77.4% of companies have beaten Wall Street’s earnings estimates while 59.1% have beaten on sales. A little more than half have beaten on both.

Stay tuned for next Wednesday, May 15. That’s when we’ll get the CPI report for April. There hasn’t been much improvement here in several months.

Apple’s Massive $110 Billion Share Buyback

Last week, Apple’s (AAPL) board of directors made news by announcing a new $110 billion share buyback plan. That’s an astounding amount of money. Of the ten largest share buyback announcements of all time, Apple owns six of them.

The plans also raised some questions about how a company ought to use its excess cash. Is a buyback plan the best thing to do with shareholders’ money? Is Apple no longer an innovation giant, or has it become a high-cash-flow value stock?

I have some thoughts about this. Ideally, I’d prefer to see a company pay out cash dividends. Apple increased its dividend by one penny to 25 cents per share. The best thing about this is that it gives shareholders the option of using their dividend payment to buy more shares, which is effectively what the buyback does automatically.

I also fear when a company holds too much cash. This often leads to unwise acquisitions. This is known as the Bladder Theory of Corporate Finance.

I have no problem with the idea of share buybacks, but I think they’re often abused. For example, too often share buybacks merely use shareholder money to buy an overpriced stock. This is what happened at Cisco (CSCO) for many years.

I also don’t like it when companies offer large stock options to their senior executives but share buybacks tend to mask how much money is at stake.

Here I have to give Apple credit. The company has gradually reduced the number of shares outstanding. In fact, over the past year, Apple’s profit declined but its earnings-per-share increased slightly thanks to fewer outstanding shares. According to MarketWatch, over the last 10 years, Apple has reduced its share count by 37%.

If you’re going to do a buyback, that’s the way to do it.

IES Holdings Revisit

Three weeks ago, I told you about IES Holdings (IESC). This is one of those great companies with an impressive track record that’s virtually ignored by Wall Street. Since 2012, it’s up 90-fold. Literally, IESC isn’t followed by a single analyst on Wall Street.

The company “provides infrastructure services including electrical, communications, low-voltage, network, AV, and security alarm systems to the residential, industrial and commercial markets.”

In the newsletter, I wrote: IESC’s next earnings report will probably be out in early May, but I can’t say what Wall Street’s consensus is since there isn’t one.” Well, on Friday, IESC released its earnings report, and it was a good one.

For its fiscal Q2, IESC’s revenues rose by 24% and its operating income was up 146%. Q2 earnings rose from $1.07 per share last year to $2.29 per share for this year. IESC has $106 million in cash and not a dime of debt. During Friday’s trading, shares of IESC jumped 18%. In two weeks, IESC gained 50%.

I certainly can’t take credit for predicting that would happen, but it does show you that there are plenty of good stocks to own that aren’t part of the Magnificent Seven.

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 May 7th, 2024 at 8:19 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.