CWS Market Review – September 13, 2019

“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt.” – President Trump

So tweeted the President of the United States. He might get his wish. Circle your calendars for next Wednesday, September 18. That’s when the Federal Reserve meets again, and it seems very likely that the central bank will once again cut interest rates. Of course, it’s not guaranteed, but the futures market thinks there’s an 89% chance that the Fed will cut. Personally, I think it will happen.

The rate cutting may not end there. The futures market thinks there’s a decent chance of another rate cut in October or December. Investors actually appear somewhat undecided as to the future of the market and the economy. That’s for a good reason. We’ve had a few economic reports pointing in different directions. This week, we also saw the market deliver one of its most abrupt sector rotations in decades. It’s confusing, but have no fear. In this week’s issue, I’ll explain what it all means.

The S&P 500 Nears Another New All-Time High

The stock market peaked on July 25. After that, it had a fairly minor downturn, but it spooked a lot of investors. I believe this was the 25th drop of 5% or more since the bull market began more than 10 years ago. The 24 others were all false drops. The market turned back every single one.

It looks like the S&P 500 is about to do it again. On Thursday, the index closed at 3,009.57. During the day, the index got over 3,020 and came within striking distance of its all-time high close of 3.025.86.

Investing consists of trends and reversals. I know that sounds obvious, but it really does lie at the heart of investing. Once the market is decided on a trend, it can last a long time. That’s perfectly well and good for investors. That is, until the reversal.

For the last several months, and years really, growth stocks have been crushing value stocks. It’s been one of the longest growth cycles on record. Then came the reaction. Since September 3, the S&P 500 Value Index is up 5.19% while the S&P 500 Growth Index is up 2.16%. That’s a huge divergence for such a short period of time.

What does it mean? Investors are rushing back to areas of the market like Financials and Cyclicals.

Areas with bond substitutes like Utilities and REITs have lagged. Not surprisingly, bonds have turned back as well. Nearly the entire yield curve beyond two years has added 0.25% in yield in the past few days. Again, that may not sound that dramatic, but it’s a major outlier from what the market has done for the last several months. At some point, the trend becomes the counter-trend.

The one ETF I like to watch here is is the Momentum ETF (MTUM). The thing about momentum investing is that it can be any industry. It’s simply what’s been working lately.

Last Friday, shortly after I sent you last week’s issue, the government reported that the U.S. economy created 130,000 net new jobs last month and that the unemployment rate remained at 3.7%. I wouldn’t call that an outstanding report, but it’s largely in line with the current trend.

Some good news is that average hourly earnings rose 11 cents to $28.11 per hour. That’s an increase of 0.4%, and it’s up 3.2% in the last year. Remember that wage hikes mean more revenues for our businesses. That will filter its way to our stocks.

There were some revisions to the nonfarm payroll data. June was revised lower by 15,000, and July was down 5,000. Within the job gains, the Census Bureau added 25,000 jobs, while manufacturing added 3,000 jobs. The Labor Force Participation Rate rose to 63.2% from 63%.

By the way, the Labor Force Participation Rate is a very misunderstood statistic, and it gets pulled out by partisans on both sides. While there is some truth that the LFPR has fallen in recent years, if you look at it from the perspective of prime working-age folks, it’s not that much of a change. For the most part, the LFPR is driven by broader demographic trends, not short-term policy proposals.

I think the big shocker this week was the inflation report. The CPI showed a modest increase in core prices. We like to look at the core rate, which excludes food and energy prices, because those can be impacted by supply issues. The core rate tends to be a lot more stable, and it gives us a good idea of the true trend of consumer prices.

Buy List Updates

I want to cautiously raise the buy below prices for two of our stocks. The first is Eagle Bancorp (EGBN). The stock got murdered a few weeks ago, but I think it’s worth holding onto. I’ll caution you that Eagle is a speculative position, but it’s always good to have a small number of these. The legal issues are serious, and I don’t want to dismiss them. Still, the shares are going for a bargain price. This week, I’m raising my Buy Below on Eagle to $47 per share.

I’m also going to raise my Buy Below on Continental Building Products (CBPX). Their last earnings report wasn’t so hot, but that probably reflected issues in the housing market. Mortgage rates have come down a lot, and that should help CBPX. I’m raising my Buy Below on CBPX to $30 per share.

The next two earnings reports we have coming up are FactSet (FDS) on September 26 and RPM International (RPM) on October 2.

That’s all for now. The big event next week will be the Federal Reserve meeting on Tuesday and Wednesday. The policy statement will come out at 2 p.m. ET on Wednesday. This will be followed by a press conference by Jerome Powell. The Fed members will also update their economic projections. Also next week, the industrial production report comes out on Tuesday. The last few haven’t been that good. On Thursday we’ll get a look at the latest report on sales of existing homes. 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

P.S. Later today, I’ll be on Bloomberg TV’s market wrap segment at 4 p.m. Tune in!