CWS Market Review – June 21, 2019 Crossing Wall Street

CWS Market Review – June 21, 2019

“Many FOMC participants now see that the case for somewhat more accommodative policy has strengthened.” – Federal Reserve Chairman Jerome Powell

That little assertion above sparked a party on Wall Street. What it means, principally, is that the Fed is leaning in the direction of slicing rates. Wall Street responded with an enormous rally. On Thursday, the S&P 500 closed at a brand-new all-time excessive.

Our Buy Listing additionally closed at an all-time excessive. We have now a pleasant lead over the market as properly. We’re now up over 21% on the yr and 2019 isn’t even midway completed.

On this week’s CWS Market Review, we’ll take a better take a look at what the Fed’s plans are. I’ll additionally preview subsequent week’s earnings report from FactSet. This inventory has been a rock star for us this yr. It’s our #1 inventory this yr, with a 50% achieve.

I also have some updates for our Buy Under costs. Because of the current rally, our stocks maintain busting past their Buy Belows. But first, let’s take a look at what the Fed needed to say this week. Or extra precisely, what they’re not saying.

The Fed Is Affected person No More

The Federal Reserve met on Tuesday and Wednesday of this week. This was an necessary assembly as a result of there’s been growing strain on the Fed to help out the financial system. The central financial institution determined towards decreasing interest rates.

Going into this assembly, there was some hypothesis that the Fed might shock us with a price reduce. Alas, that didn’t happen, but the Fed seems to be extra open to slicing charges in the future. In truth, one member, St. Louis Fed President James Bullard, voted to chop charges immediately.

Of their coverage statement, the Fed noted the general power within the financial system. Importantly, the Fed eliminated a key sentence. The phrases “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal-funds rate may be appropriate to support these outcomes” have been absent from this assertion. Previously, the “patience” referred to the need to increase interest rates.

The assertion contained this sentence: “The Committee continues to view sustained expansion of economic activity, strong labor-market conditions and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.” And it added: “but uncertainties about this outlook have increased.”

That’s telling. The FOMC debates these phrases rigorously. There are clearly Fed members along with Bullard who need to see rates go down soon.

The Fed also launched its economic projections for the approaching few years. Right here’s where things get fascinating. Despite the market’s want for fee cuts, a slim majority at the Fed sees no need to chop charges this yr. After that, they only see one price minimize coming subsequent yr.

Wall Street is way from this view. Very far. In response to the newest futures prices, a minimize at next month’s assembly is a foregone conclusion. I’m not exaggerating. The futures market has the chances of a reduce priced at 100%. You’ll be able to’t get rather more sure that that! One month in the past, the chances have been at 20%.

On prime of that, they see the chances of a minimize at the following assembly, in September, at 87%. I’m puzzled by this degree of certainty. Actually, futures merchants see a 3rd fee minimize coming earlier than the top of the yr.

While it’s true that the Fed seems to have shifted its stance in the direction of being more open to price cuts, I feel the market is significantly overestimating the Fed’s willingness to chop rates as soon as, or perhaps a few occasions. Every time there’s a disagreement between market prices and a committee of economists, it’s often a good idea to take the market’s opinion with higher weight. This time, I’m not so positive. It’s one thing to take again a wrongheaded fee hike in December. It’s quite one other to cut rates by 1% over the approaching yr.

For his or her part, the bond market is all on board for price cuts. This week, the yield on the 10-year Treasury dipped under 2%. The yield is now back to where it was earlier than President Trump was elected more than two-and-a-half years ago. Within the final seven months, the yield has dropped 120 foundation points.

What this means is that the monetary markets are very involved concerning the sustainability of the financial system. Probably the most fascinating a part of the yield curve is the world around two to 3 years in the past. Yields here have plunged very low in anticipation of Fed fee cuts. However it seems that buyers aren’t anticipating a protracted cycle of decrease rates. The yield curve begins to rise again after three years out.

On Thursday, the worth of gold had its greatest day in three years. Gold is now at a six-year excessive.

Wall Street seems convinced on three factors: we’d like three or four fee cuts, the Fed will oblige us and these cuts can be profitable. Frankly, I’m a doubter on all three.

What to do now? The Fed’s policy change has been excellent for share prices. Thus far, this has been one of the best June for the S&P 500 since 1955. Despite my skepticism relating to the Fed’s willingness to assist us out, we’ve been doing very properly.

There’s been a shift within the rally. Beginning in June, the low-vol sectors started to lag. This comes after a number of weeks of trouncing the market. In June, tech has accomplished properly, whereas areas like financials have lagged. This is sensible as banks like greater interest rates.

Buyers ought to continue to concentrate on high-quality stocks like these we have now on our Buy Listing. Pay specific consideration to stocks that pay nice dividends. This consists of shares like Hershey (HSY), Hormel Meals (HRL) and AFLAC (AFL). Now let’s take a look at a Buy Record stock that just lately raised its dividend for the 14th yr in a row.

Search for Good Earnings Subsequent Tuesday from FactSet

We’re now in the sluggish interval for Purchase Record earnings stories. On Tuesday, June 25, FactSet (FDS) is due to report. After that, we gained’t see our next earnings report till mid-July when the Q2 earnings season begins.

FactSet has been on a tear for us this yr. It’s our top-performing stock, with a YTD achieve of greater than 50.three%. On a aspect notice, FactSet is certainly one of our off-cycle shares. Their final quarter led to Might. We’ve got one other inventory on the same fiscal cycle, RPM Worldwide (RPM), but they gained’t report for an additional month.

Enterprise is going very properly for FactSet. Three months ago, FDS reported fiscal Q2 earnings of $2.42 per share. That was nine cents better than Wall Street’s consensus. Quarterly revenue rose 5.9% to $354.9 million, and organic revenue rose 5.7%.

The important thing stat for FactSet is Annual Subscription Value, or ASV. In Q2, ASV rose to $1.44 billion. I used to be additionally pleased to see FactSet improve its adjusted operating margin to 33.2% from 31.4% a yr ago. That’s a very good signal.

As of the top of Q2, FactSet has a shopper rely of 5,405. That’s a rise of 108. The consumer rely increased by 6,854 to 122,063. Annual shopper retention is bigger than 95% of ASV.

In March, FactSet also updated its monetary steerage. The corporate expects income to vary between $1.41 billion and $1.45 billion. They see adjusted operating margin between 31.5% and 33.5%. They see full-year earnings between $9.50 and $9.65 per share. That was a rise of 5 cents to the low end.

Extra excellent news got here final month when FactSet raised its dividend by 12.5%. The quarterly payout increased from 64 to 72 cents per share. The stock retains churning greater. Last week, FDS broke above $300.

The consensus on Wall Street for next week’s earnings report is $2.36 per share. Look for one other beat. I’ll in all probability improve our Buy Under on FDS, but I need to see the earnings report first.

Purchase Listing Updates

I’ve some comments on a number of other shares. This week, the Verge ran an expose on the content screens at Facebook. It’s a disturbing story about how they have to observe graphic content material on the Internet for hours on end. Whereas the workers work at Fb, they work for Cognizant Know-how Options (CTSH).

I need to be clear that there are not any specific allegations of wrongdoing, nevertheless it’s not a flattering story. Cognizant is correctly staying ahead of the news. The corporate launched a press release reiterating their help for office safety.

This shouldn’t have any impression on the company’s financial health, but I needed to make you aware of the newest information.

There’s not much to add after the fallout from the Raytheon (RTN)/United Applied sciences (UTX) deal. In Barron’s, Andrew Bary stated that the deal has pulled off a rare feat: it’s upset both sets of shareholders. He’s proper. If someone pulled the plug on the deal, each stocks would rally.

If there’s a silver lining, it’s that the current dip in share worth has made RTN a great worth right here. In line with Invoice Ackman, UTX is utilizing their undervalued shares to buy us out. I don’t see a means that the merger might be referred to as off. We’re stuck with it.

With the market’s current surge, I need to modify a couple of of our Buy Under costs. Hershey (HSY), for example, has been rallying steadily for a couple of weeks. Since April 24, shares of HSY are up greater than 18%. The chocolatier is an effective instance of a defensive inventory. It does greatest when individuals are scared. I’m raising our Buy Under to $145 per share.

Stryker (SYK) is now a 30% winner for us this yr. This is among the most consistent long-term winners you’ll find. The stock obtained up to a brand new 52-week excessive on Thursday. Extra good earnings news should come next month. I’m raising our Purchase Under to $208 per share.

Danaher (DHR) will report its Q2 earnings in July 18. The company expects earnings to vary between $1.13 and $1.16 per share. Earlier, Danaher lowered its full-year steerage from $4.75 – $four.85 per share to $four.72 – $4.80 per share. This reflects the share dilution to purchase GE Biopharma. The deal should close sometime in This fall. This week, I’m elevating my Buy Under on Danaher to $150 per share.

That’s all for now. Next week is the final buying and selling week of the first half of the yr. We’ll get a couple of essential economic studies. On Tuesday, the new-home gross sales report comes out together with shopper confidence. On Wednesday, we’ll get the newest report on sturdy items. On Thursday, the federal government will update the Q1 GDP numbers. The last report showed that the U.S. financial system grew, in actual terms, at a 3.1% clip in the first quarter. Remember to hold checking the weblog for every day updates. I’ll have more market evaluation for you in the subsequent concern of CWS Market Review!

– Eddy

Posted by Eddy Elfenbein on June 21st, 2019 at 7:08 am

The knowledge in this weblog publish represents my own opinions and does not include a suggestion for any specific safety or funding. I or my affiliates might hold positions or different interests in securities mentioned within the Weblog, please see my Disclaimer page for my full disclaimer.