CWS Market Review – May 12, 2019

“The greatest ability in business is to get along with others and to influence their actions.” – John Hancock

Fourteen years ago, Twitter didn’t exist. Today it can help destroy trillions of dollars in global market cap. Bloomberg ran the numbers and found that President Trump’s 102-word tweet storm regarding Chinese tariffs sparked a selloff that totaled $1.36 trillion. The volatility index jumped 50% in just two days—and it all began with two tweets.

Does this mark the beginning of the end? Eh…I doubt it. Let’s remember that the bulls have had a good run this year, so it’s natural for the bears to strike back. First, some recent history. On April 26, the S&P 500 finished the session at an all-time high close. In other words, we made back everything we lost from the ugly market we had late last year. Then on Tuesday, April 30, the index closed out the month at 2,945.83, yet another all-time high close.

On Friday, May 3, the government reported that the unemployment rate fell to its lowest point in 50 years. That day, the S&P 500 closed at 2,945.64, a hair below its all-time high close from three days before. That can often be a bad omen, when the index fails to make a new high, even by a tiny bit.

After that, we got the President’s tweets, and then bad things started to happen. The S&P 500 fell four days in a row for a total loss of 2.54%. Of course, in the large scheme of things, that’s not a very big loss. Plus, the market gained another 0.37% on Friday.

So what’s going on? In this week’s issue, we’ll take a closer look at the president’s tweets and their impact on the market. We’ll also focus on our three Buy List earnings reports from this week. I’m also happy to say that our Buy List has been performing quite well versus the market in recent days. As usual, when investors get scared, they find solace in high-quality stocks, and that’s us. But first, let’s look at the amazing April jobs report.

The Lowest Jobless Rate in 50 Years

On Friday, May 3, the government reported that the unemployment rate fell to 3.6%. That’s the lowest level since December 1969. If we look at the peacetime rate, then it’s the lowest in 70 years. For women, we now have the lowest jobless rate since 1953. The brief slowdown we saw earlier this year has clearly passed.

The jobs report said the U.S. economy created 263,000 net new jobs last month. If you recall, we had a pretty lousy jobs report just two months ago. The government said the economy created just 20,000 net new jobs on February. That report shocked a lot of people, and some even thought it might be the beginning of a recession. As it turns out, the February slowdown was a minor blip in the economy. The jobs gain for February has now been revised upward to a gain of 56,000 jobs.

There is a weak spot amid the good news, and that’s wage growth, which is still sluggish. Over the past year, average hourly earnings are up 3.2%. That’s better, but I’d like to see it higher. Higher wages means more revenue for businesses. Plus, there’s no evidence that inflation is heating up. On Friday, the government said that consumer prices rose 0.3% last month. That’s not much, and the “core” rate increased by 0.1%. That’s the third month in a row that core inflation is up by 0.1%. Over the last year, inflation is up 2%, while core inflation is up by 2.1%. This is good news for investors. Importantly, it suggests that the Fed won’t do much for the rest of this year.

Now let’s look at the Twitter front of the trade war. The stock market got spooked this week by a pair of tweets President Trump posted last Sunday evening. In them, he threatened to escalate the brewing trade war with China. I need to stress that markets aren’t particularly worried about the tariffs the U.S. imposes. Rather, they’re concerned about retaliatory tariffs from China, or other countries, on U.S-made goods. Worst of all, this kerfuffle could spark an all-out trade war in which tariffs are constantly hiked by two sides that refuse to back down.

In the short term, tariffs on Chinese goods would give a quick boost to their U.S.-based competitors. Of course, those companies would quickly raise prices on consumers, since the playing field has been emptied. But it gets tricky, because trade is a nonlinear relationship. For example, tariffs would also hurt American companies that rely on suppliers based in China. The recent CPI report showed that inflation isn’t a problem, so consumers aren’t yet feeling the pinch of these policies.

I think the safe assumption is that the trade threats can only go so far. Both sides have too much to lose. President Trump has often mentioned that in negotiations, he likes to talk tough as an initial bid, only to soften his stance as the discussions progress. That leaves the White House in a precarious situation where it wants to convince China that it’s serious while assuring financial markets that it’s open to bargaining.

There could be something to this. On Friday, the Dow staged a 450-point comeback after President Trump tweeted positive comments on trade negotiations. He even left the door open to tariffs being removed in the future. Surely, much of this (on both sides) is due to domestic political concerns rather than a coherent overview of trade policy.

As usual, I’ll skip the political angle and focus on what it means for us. Make no mistake, a trade war is bad for business. The recent tariffs aren’t good for stock investors. However, it’s in everyone’s interest to work together on these issues. That’s why the trade rhetoric will be much more heated than actual policy. The tariffs are a thorn in the side, not a dagger in the heart. The overall climate continues to be very good for investors.

On that note—though I’ll probably jinx it by even mentioning it—the market’s recent slide has been quite good for our Buy List. I should add that I mean that in a relative sense. We’re down, but not as much as everyone else. I sometimes hear investors criticize me for the “we suck less” argument, but in my view, these are the periods that really separate good investors from the pack.

Over the last week, our Buy List is down 0.65% compared to the S&P 500’s loss of 2.18%. That’s a lot for one week. Since April 22, the Buy List is up 1.61%, while the S&P 500 is down 0.91%. I should caution investors not to be overly frightened by short-term losses nor overly pleased by short-term gains. As always, we’re focused on the long term.

Through Friday, our Buy List is up 16.59% this year (that doesn’t include dividends). The S&P 500 is up 14.94%. Sixteen of our 25 stocks are beating the market. FactSet (FDS) is our biggest winner, with a 40% YTD gain. Eight of our stocks are up more than 22% on the year.

At the beginning of 2018, we added Church & Dwight (CHD) as a new stock. Early on, it was a flop, but I’m glad we stuck with it. In a little over a year, CHD is up over 61%. In fact, most of our defensive stocks have been doing well lately. By that, I mean names like Smucker (SJM) and AFLAC (AFL). Hershey (HSY) has also been strong. This makes sense. A trade war won’t have much of an impact on the chocolate-bar biz. Now let’s look at some recent earnings news.

Three Buy List Earnings Reports this Week

We had our final three Buy List earnings reports of this earnings season. On Tuesday, Broadridge Financial Solutions (BR) reported fiscal Q3 earnings of $1.59 per share. That was nine cents better than expectations.

However, Broadridge had mixed news on their guidance. The company lowered its full-year revenue growth forecast from 3% to 5%, down to about 1%. BR reiterated its full-year EPS growth of 9% to 13%. Last year, the company made $4.19 per share, so the current outlook works out to $4.57 to $4.73 per share. Through the first three quarters, Broadridge had earned $2.94 per share.

The shares pulled back a bit on Tuesday, but stabilized and then rallied on Friday. The CEO said, “After a solid third quarter, Broadridge is very well-positioned to deliver strong full-year results.” I have to agree. In the last seven week, the stock is up 19%. This week, I’m lifting my Buy Below on Broadridge to $125 per share.

After the bell on Wednesday, Disney (DIS) reported Q1 earnings of $1.61 per share, three cents better than estimates. There’s been so much news about Disney recently that the earnings report almost seems anti-climatic.

Disney said it expects Disney+, the new streaming service, to be profitable by 2024. While the Avengers movie is still crushing it at the box office, the theme parks had a very good Q1. Net income for the parks totaled $1.5 billion for the first quarter.

Disney’s overall profits are down this year, but that’s because of the big movie hits it had in 2017. That’s the nature of the entertainment business. I really like the direction that Disney is taking. I’m raising my Buy Below on Disney to $140 per share.

While I like the news from the previous two companies, I wasn’t thrilled by the news from Becton, Dickinson (BDX). For Q2, the company reported earnings of $2.59 per share, which beat estimates by one penny per share.

Becton, Dickinson lowered its full-year revenue guidance of growth of 8.5% to 9.5% down to 8.0% to 9.0%. The company blamed the negative impact of currency exchange. BDX hasn’t changed its currency-neutral forecast of revenue growth of 4% to 6%. Becton sees full-year earnings ranging from $11.65 to $11.75. The company blames currency exchanges plus “recent regulatory and market pressures related to paclitaxel-coated devices.” The previous range was $12.05 to $12.15 per share.

The shares dropped over 3% at Thursday’s open. Fortunately, the stock didn’t fall as much as I had feared. Nevertheless, I’m lowering my Buy Below on Becton from $260 to $234 per share.

That concludes the first-quarter earnings season for our Buy List stocks. Coming up, we have three Buy List stocks with reporting quarters that ended in April. The three stocks are Hormel Foods (HRL), JM Smucker (SJM) and Ross Stores (ROST). Ross and Hormel are due to report on May 23, while Smucker is due to report on June 6.

That’s all for now. I expect to see more volatility in the market next week. We’re going to get a few key economic reports. On Wednesday, the retail-sales report for April is released. This will be one of our first data points to see how well Q2 is looking. Also on Wednesday, we’ll also see the report on industrial production. On Thursday, we’ll get the housing-starts report, plus another jobless-claims report. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy