CWS Market Review – June 11, 2024

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

The S&P 500 Makes Another All-Time High

The stock market closed today at yet another all-time high. This market has been impressively resilient, especially the growth side. Since May 1, the S&P 500 has gained 7.1%.

I noticed that shares of Apple popped to a new high today on news that it’s unveiling AI software. These days, all you have to do is mention AI and your stock may double. I’m exaggerating, but not by much.

Not that long ago, the market was looking a lot more fragile. On May 31, the index came close to touching its 50-day moving average but instead of falling through, the market bounced four days in a row.

Wall Street was helped on Friday by a surprisingly strong jobs report for May. The Labor Department said that the U.S. economy added 272,000 net new jobs last month. That was ahead of Wall Street’s forecast for a gain of 190,000 jobs. For context, the economy added 165,000 new jobs in April.

So is the economy soaring? Well, not exactly. The jobs report was a mix of good and bad news. The unemployment rate rose to 4.0%. That’s the first time it’s reached that level since January 2022. The labor force participation rate fell 0.2% to 62.5%. The broader U-6 rate stayed the same at 7.4%. In December, the U-6 rate was at 6.5%.

You can see that a lot of the job gains are really us getting back to the jobs trend that existed before Covid.

There are other areas of concern. For example, the separate household survey showed that the number of full-time jobs fell by 625,000 while part-time jobs rose by 286,000.

Here are some details:

Job gains were concentrated in health care, government, and leisure and hospitality, consistent with recent trends. The three sectors respectively added 68,000, 43,000 and 42,000 positions. The three sectors accounted for more than half the gains.

Other significant growth areas came in professional, scientific and technical services (32,000), social assistance (15,000), and retail (13,000).

One important bright spot is that average hourly earnings increased by 0.4% last month. That’s good to see. Wall Street had been expecting an increase of 0.3%. Over the last year, average hourly earnings are up by 4.1%. Unfortunately, a lot of that increase has been eaten up by inflation.

Why Is the Fed Talking About Cutting Rates?

With the jobs market mostly healthy and the stock market at new highs, why exactly are we talking about the Federal Reserve cutting interest rates? That’s a good question, and the answer is not entirely clear.

The latest futures prices indicate that Wall Street is about evenly divided on the need for an interest rate cut by September. Not that long ago, a broad consensus assumed that we’d be slashing rates by now. I wouldn’t be surprised to see growing dissention within the Fed.

Inflation is still above the Fed’s target, but it’s a lot better than it was a year ago. The Fed hasn’t changed rates in nearly a year, and it’s clear that higher rates have had a major impact on the economy.

We’ll get more important info. tomorrow morning when the June CPI report comes out. Wall Street expects the CPI to have increased by 0.1% last month and the core rate to have increased by 0.3%. Over the last year, Wall Street thinks the CPI rose by 3.4% and the core rate increased by 3.5%.

The Federal Reserve started its two-day meeting today. The policy statement will be released tomorrow afternoon. Don’t expect to see any change to interest rates. The Fed will also update its economic projections for the next few years (the dot plot).

I’ll be curious to see what the Fed expects for GDP growth for this year. The Q1 GDP report wasn’t so hot, but I don’t know if this was a hiccup or the start of a trend.

The last time the Fed updated its economic projections, the members saw the need for three rate cuts this year. Spoiler alert: That ain’t gonna last. My guess is that the Fed cut that back to two rate cuts. It seems that getting inflation from 9% to 3% was surprisingly easy but getting it from 3% to 2% is surprisingly difficult. At some point, it might be easiest for the Fed to declare victory and walk away from its 2% inflation target.

I’ve discussed my concern that the current market rally is too heavily tilted towards growth stocks. That’s not getting any better. If anything, the spread is getting worse. Typically, value stocks do better as interest rates fall, so the recent surge in growth stocks is closely tied to a more reluctant Federal Reserve.

Value stocks have become widely unloved. I counted 71 stocks within the S&P 500 that have a dividend yield of more than 4%, and that’s not all utilities and REITs.

Stock Focus: Hawkins Inc.

As you probably know, I love finding great stocks off the beaten path, especially ones that have done well and are ignored by Wall Street.

One such company is Hawkins Inc. (HWKN) of Roseville, Minnesota. The company describes itself as a “leading specialty chemical and ingredients” company.

Snoresville, right? No, Hawkins isn’t the most exciting business, but it’s an important one, and it’s something people need. Hawkins “formulates, distributes, blends, and manufactures products for its Industrial, Water Treatment, and Health & Nutrition customers.”

Hawkins has been around since 1938. The company has 60 facilities across 27 states. Hawkins has about 950 employees and last year, it generated revenue of $919 million.

Now for the best part. Since 2000, Hawkins is up by more than 36-fold. The S&P 500 looks like a flat line in comparison. Hawkins has also raised its dividend fairly consistently for nearly 40 years.

You might think that with a track record like that, and a with a market value of nearly $2 billion, Hawkins would grab Wall Street’s attention. That’s not the case. Hawkins is followed by just two analysts. Maybe they should change their name to AI Hawkins?

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on June 11th, 2024 at 6:17 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.