CWS Market Review – June 25, 2024

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Tomorrow is the 11-month anniversary of the Federal Reserve’s last rate hike. On July 26, 2023, the FOMC voted to raise its target range for the Fed funds rate to 5.25% to 5.50%. Since then, the Fed hasn’t made a single change to rates.

It’s odd how doing nothing can receive so much attention. Still, I must acknowledge that the stock market has done very well under steady rates, especially since last October. Sometimes doing nothing is the right thing to do.

This has also become a surprisingly calm market. The S&P 500 has only had very small down days this month. We haven’t had a 2% daily loss since February 2023.

Here’s an interesting stat: The S&P 500 hasn’t closed lower by more than 0.75% in a single day for the last 38 trading sessions in a row. Bear in mind that a fall of 0.75% isn’t that much. For some context, in 2022, we had 77 daily drops of more than 0.75%.

We’re still a long way from the record. In 1965-66, the stock market went for 135 days in a row without a drop of more than 0.75%.

Home Values Reach New High

Thanks to the Fed’s rate hikes, mortgage rates have increased. The 30-year fixed-rate mortgage rose sharply last month. While that has impacted the overall housing market, home prices are still rising.

This morning’s Case-Shiller index on home prices said that home values are at an all-time high. For April, home prices on its 20-city index increased by 0.4%.

Over the last year, prices on the 20-city index are up by 7.2% which is down slightly from the 7.5% increase for the 12 months ending in March. The broader national index increased by 0.3% in April and is up by 6.3% over the last year. All these price indexes are at all-time highs.

A separate report from the Federal Housing Finance Agency said that home values increased by 0.2% in April and are up 6.3% over the last year. The median price of a resale home was $407,600 in April, and a newly built home was $433,500.

Sales are down yet sales prices are higher than ever. What’s going on? Moses Sternstein makes the point that the sales indexes only capture what’s selling, but right now, the important factor is what’s not selling.

In other words, more owners might be willing to sell if buyers could afford it, but the people who are buying right now could simply be less price sensitive. In fact, homebuilders have been cutting prices, which makes sense to me. I trust what the homebuilders are doing more than what the sales indexes are saying. For most homeowners, home values are not rising.

Will Interest Rates Soon Come Down?

Will the Fed start cutting rates soon? Beats me, but Fed Governor Michelle Bowman said she’s open to seeing more rate hikes if inflation doesn’t pull back. In a speech today, Governor Bowman said that we’re not yet at the point to look for interest rates come down.

This places her with other Fed officials who have acknowledged lower inflation but still want to see more evidence that inflation is no longer a threat. I’ve been surprised by how united the Fed appears to be on this point.

We’ll learn more on Friday when the Commerce Department releases its PCE price index report. This report always comes out the day after the GDP report. (I’ll also be curious if the Q1 GDP report is revised lower again.)

As I often say, the PCE is the Fed’s preferred measure of inflation. Wall Street expects that the PCE will have increased by 2.6% over the 12 months ending in May. This is for the headline and core PCE. The Fed has a 2% target for inflation. I’m surprised at how firm the Fed has been publicly to achieving its 2% target.

The current consensus is that the Fed won’t change interest rates at its next meeting which is at the end of July. However, Wall Street expects the Fed to cut rates in September. The futures market thinks there’s a 68% chance that the Fed will cut in September.

The direction of interest rates has a major impact on the stock market. For one, interest expense is a major item for many companies. Lower rates also help larger companies buy smaller ones. Lower rates provide weaker competition for stocks so share prices can afford to go higher.

There’s also an important impact within the stock market. When rates go down, investors tend to favor value stocks, but as rates stay up, like they are now, growth stocks tend to do well. We’ve certainly seen that this year, especially in the last few weeks.

The current stock market has been dominated by one growth stock above all others, Nvidia (NVDA). Nvidia has gotten so big that its news can move the entire market. From last Thursday’s high to yesterday’s low, Nvidia lost 15.5%. That’s over $500 billion in market value.

Fortunately, that selloff came to a quick end today. Shares of NVDA rallied 6.8% today which helped lift the entire Nasdaq. For the day, the Nasdaq was up by more than 1.25% while the Dow was down 0.76%. Interestingly, that nearly perfectly mimicked the growth/value divide today. The S&P 500 Growth ETF gained 1.25% today while the S&P 500 Value ETF lost 0.8%. That’s a wide gap even for this point in the market. Once rates start to go down, this may all unwind.

Stock Focus: Chemed

This week, I wanted to tell you about Chemed (CHE). I can’t fairly say that Chemed is unknown on Wall Street. It’s currently followed by three analysts, but it deserves a lot more attention.

Chemed is also one of the most unusual publicly traded companies I know of. Based in Cincinnati, Chemed runs two wholly-owned subsidiaries. One is VITAS Healthcare which is the country’s largest provider of end-of-life hospice care. The other subsidiary is Roto-Rooter.

I’m not making this up. Chemed runs hospice care and Roto-Rooter, the plumbing folks. I can’t imagine a more dissimilar business. Hey, it works for them so I’m all for it. Chemed has over 15,000 employees and a market value of $8 billion.

On this day in 1991, you could have picked up shares of CHE for about $10.44 apiece. Today, 33 years later, CHE is going for $540 a piece. That’s a gain of more than 50-fold.

Last year, Chemed made $20.23 per share. The analyst community, all three of them, looks for Chemed to make $23.21 per share this year and $25.28 next year as well. The company has increased its dividend for the last 14 years in a row. I expect to see another increase this August.

I’m showing you Chemed because there’s an important lesson for investing here. Any company can be a very profitable business, even seemingly unusual ones. Don’t be afraid to go off the beaten path in order to find superior companies. There aren’t many stocks up 50-fold in 33 years, but Roto-Rooter did it. I’m sure there’s another out there right now.

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

– Eddy

Posted by on June 25th, 2024 at 4:54 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.