Monday Tee Up: Is Inflation Still Tracking Lower?

Since 2021, the biotechnology industry has underperformed the broader market, reversing a multi-year trend that had seen superior returns since coming out of the Great Recession. In 2021 and 2022, the equal-weight SPDR Biotech ETF (XBI), which includes more small-cap, development-stage companies, declined 21% and 26%, respectively, compared with a 27% gain and 18% decline for the S&P 500, including dividends. The trend continued in 2023, with XBI gaining 8% compared with a 24% advance for the S&P 500. We attribute the underperformance, particularly for development-stage companies, to factors including a "risk-off" environment amid elevated inflation and increasing interest rates, which contributed to challenging financing markets and a near closing of the IPO window. As well, an elevated number of biotech companies traded below their cash reserves and explored strategic alternatives or bankruptcy. We note increased scrutiny over runaway drug pricing weighing on the industry. But the tide may be turning. Biotech has been on fire since bottoming a few months ago, with the iShares Nasdaq Biotech (IBB) surging 20%-plus and printing a minor breakout of its range back to January 2022. Looking ahead, mergers and acquisitions (M&A) and the ability to raise capital are major keys to growth in the industry. We are encouraged by the return of some larger scale M&A deals and a seemingly healthy appetite for deals from larger biotech and big pharma players, as a new wave of patent expirations for many high-revenue-generating medicines is expected in the second half of the decade.

Rapidly rising inflation in 2022 knocked stocks into a bear market. While growth strategies suffered the most, value strategies also declined. Even bond prices were lower last year. Stocks have recovered thus far in 2023, but gains have been largely driven by only a handful of high-tech companies. Inflation remains high and the Fed continues to raise rates. Is a recession in the offing? With all the uncertainty, is it time for investors to cash in their chips? We note that investors exit the stock market at their own peril, as long-term returns from equities consistently have outpaced long-term returns from other asset classes, such as fixed income and cash. Argus believes that Min Vol is an all-weather strategy that is timely in any investing climate. Academic literature and, more to the point, returns history, indicate that Min Vol can deliver market-matching returns on an absolute basis and superior returns on a risk-adjusted basis over various time periods.

Here is the list of the Top Picks for 2024 from the Argus team of analysts. The team is deeply experienced, as each analyst has spent ,on average, 25 years on Wall Street and 15 years at Argus Research. As such, our analysts are extremely well-versed in our proprietary fundamental six-point system and the sectors they cover. They also have solid relationships with many of the management teams they cover. But they do not operate in a vacuum. An Investment Policy Committee (IPC) comprised of Director of Research Jim Kelleher, CFA; President John Eade; Chief Compliance Officer & Senior Financial Analyst Kevin Heal; and Director of Financial Institutions Research Steve Biggar provide macro outlooks for the economy, interest rates, earnings, and the stock market. The IPC reviews all proposed ratings changes. Our list below is organized by sector.

Sustainable Impact Investing, or ESG investing, is gaining traction not only with Argus Research clients but also with the global investment community. BlackRock CEO Lawrence Fink, who oversees approximately $9 trillion in assets, announced in January 2020 that his firm would be investing in companies that are making progress on sustainability. He doubled down in his January 2021 letter, calling on company managements to disclose their plans for making their businesses "compatible with a net-zero economy" by 2050. As assets have flowed in over the past 40 years, Sustainable Impact Investing has evolved. The discipline, originally known as Socially Responsible Investing, focused at first on excluding companies that conducted business in South Africa, or participated in industries such as tobacco, alcohol, and firearms. Performance of these initial strategies lagged, and the approach has been modified. Now, instead of merely identifying industries to avoid, the discipline promotes "sustainable" business practices across all industries that can have an "impact" on global issues such as climate, hunger, poverty, disease, shelter, and workers' rights.

Sustainable Impact Investing, or ESG investing, is gaining traction not only with Argus Research clients but also with the global investment community. BlackRock CEO Lawrence Fink, who oversees approximately $9 trillion in assets, announced in January 2020 that his firm would be investing in companies that are making progress on sustainability. He doubled down in his January 2021 letter, calling on company managements to disclose their plans for making their businesses "compatible with a net-zero economy" by 2050. As assets have flowed in over the past 40 years, Sustainable Impact Investing has evolved. The discipline, originally known as Socially Responsible Investing, focused at first on excluding companies that conducted business in South Africa, or participated in industries such as tobacco, alcohol, and firearms. Performance of these initial strategies lagged, and the approach has been modified. Now, instead of merely identifying industries to avoid, the discipline promotes "sustainable" business practices across all industries that can have an "impact" on global issues such as climate, hunger, poverty, disease, shelter, and workers' rights.

Last month, the top-level inflation rate in the U.S. fell to the lowest level on a year-over-year since September 2021, as most price increases appear to be easing. The rate of core inflation also ticked lower. The CPI numbers were ahead of consensus expectations and Argus forecasts -- and financial markets responded with a rally. The Bureau of Labor Statistics reported a 3.2% increase in overall inflation year-over-year through October, compared to a 3.7% rate through September and a 9.1% rate in June 2022. The core rate, excluding the impact of food and energy prices, declined as well -- to 4.0% in October, versus 4.1% in the prior month. Month-over-month, the all-items CPI was flat, and the Core CPI increased only 30 basis points. Segments of the economy with stable/easing prices year-over-year included Energy, Used Cars & Trucks, and Medical Care Services. New Vehicles and Apparel prices increased. Inflation rates continue to be propped up by Transportation Services and Shelter. We continue to think that the June 2022 CPI rate was the peak reading for the index this cycle, as the housing market cools, supplies of new vehicles are replenished, and the price of oil stays below $90 per barrel. The Federal Reserve has lifted the feds fund rate from 0.0% to above 5.25% over the past 18 months, and the rate hikes appear to be reducing inflationary pressures. The next question is whether the rapid rate of increases will tip the economy into a recession as inflation continues to head toward 2.0%. We look for the U.S. central bank to be lowering rates in 2H24, as their concern shifts more toward economic growth.

Stocks soared on Tuesday morning following cooler-than-expected inflation data. The Labor Department said that consumer prices rose 3.2% from the prior year in October, down from a 3.7% gain in September and below the consensus forecast of 3.3% growth. The core CPI, excluding volatile food and energy prices, rose 4.0%, down from 4.1% a month earlier and also below the consensus forecast. The Dow rose 1.4%, the S&P 1.8%, and the Nasdaq 2.1%. Crude oil rose 1% to $79 per barrel, while gold traded near $1969 per ounce.

Argus has published its latest Portfolio Selector, which features its popular Focus List. Each month, Director of Research Jim Kelleher, CFA, surveys the team of Argus Research industry analysts for their timeliest recommendations out of the company's fundamental universe of approximately 500 stocks. The Focus List typically includes 30 stocks: turnover is high, as Jim typically adds three or four new stocks per month. Below are the latest additions, all of which are rated BUY at Argus.

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are Linde Plc. (LIN); Crowdstrike Holdings Inc (CRWD); Advanced Micro Devices Inc. (AMD); Vertex Pharmaceuticals, Inc. (VRTX) and the Focus List deletions are Adobe Inc (ADBE); Albemarle Corp. (ALB); Catalent Inc. (CTLT); Intel Corp. (INTC).

Stocks declined on Wednesday morning on rising oil prices as fears that persistent inflation will keep the rates higher. The ISM non-manufacturing Purchasing Managers' Index (PMI) came in at 54.5, compared with expectations of 52.5. In other news, Apple fell after a report that China has banned government officials from using iPhones for work. The S&P 500 fell 0.8%, the Dow 0.6% and the Nasdaq was down 1%. Crude oil traded near $87 per barrel and gold fell $11 to $1941.

Stocks declined on Wednesday morning on rising oil prices as fears that persistent inflation will keep the rates higher. The ISM non-manufacturing Purchasing Managers' Index (PMI) came in at 54.5, compared with expectations of 52.5. In other news, Apple fell after a report that China has banned government officials from using iPhones for work. The S&P 500 fell 0.8%, the Dow 0.6% and the Nasdaq was down 1%. Crude oil traded near $87 per barrel and gold fell $11 to $1941.

Stocks rose on Tuesday morning after positive inflation data raised the likelihood of a pause in the Fed's rate hike cycle. The Labor Department said that its consumer price index rose 4.0% from the prior year in May, down from 4.9% in April and slightly below the Reuters consensus forecast of 4.1% growth. Core consumer prices, excluding food and energy, rose 5.3% from the prior year, also slowing from 5.5% growth in April. The Dow rose 0.4%, the S&P 0.5%, and the Nasdaq 0.4%. Crude oil traded near $70 per barrel, while gold fell slightly to $1969 per ounce.

Our analysis of data that has been reported in recent weeks leads us to conclude that key parts of U.S. GDP are still expanding, despite the impact of inflation, the pandemic, and geopolitical developments. That said, growth is not consistent across all segments of the economy and, in many cases, growth rates are slowing. The risk of recession is real -- but a U.S. recession is not a foregone conclusion. After reviewing the latest economic fundamentals, we have raised our 1Q23 GDP estimate to 1.4% from our prior forecast of 1.3%. We look for uneven growth in 2023, with the high possibility of a negative quarter or two because of higher interest rates. For the year, we look for the economy to improve as the year goes on. Our estimate for the full year 2023 is now 1.4%. The U.S. Federal Reserve is combating inflation with aggressive rate hikes. Our preliminary forecast for GDP growth in 2024 is 1.7%, as the Federal Reserve, with its tool chest once again full after hiking rates during 1H23, can contemplate lowering interest rates to recharge economic growth. Generally, our estimates are in the range of other forecasters, though perhaps a bit higher than the consensus. The Wall Street Journal Economic Survey calls for GDP growth of 0.2% in 2023 and 1.9% in 2024. The Federal Reserve is anticipating GDP growth of 0.4% for 2023, and for growth of 1.2% in 2024. Meanwhile, the IMF is calling for 2023 growth of 1.4%, and the Philadelphia Federal Reserve's Survey of Professional Forecasters is calling for growth of 0.7% in 2023 and 1.8% in 2024. The GDPNow Forecast from the Federal Reserve Bank of Atlanta is 1.7% for 1Q23.

The stock market has held up again (as of this writing!), despite additional bearish news about the global banking system. This time, Europe imploded (after already having booked a nasty decline). Indeed, once contagion starts, it generally does not stop on a dime -- but rather continues down an increasingly negative path.

The S&P 500 is at its highest point since the October low, and the index is inching closer to important resistance -- the 200-day average at 4,062 and the bear-market trendline at 4,100 (when looking out a few weeks).

Calm Mid-Term Elections, CPI Lift Stocks

Another "Fed Day" is here, with the FOMC expected to raise the federal funds rate by 75 basis points (bps) for the fourth consecutive time since June 16. Assuming that happens, it will push the target rate to 3.75%-4%. Since March 17, only 7.5 months ago, the Fed will have raised the funds rate by 375 basis points. Of course, when you start late and from 0%, the current action shouldn't be much of a surprise.

We are raising our intermediate-term technical outlook to bullish from neutral. The major indices all made a stand at their June lows and posted extremely strong breadth days to open October and the seasonally strong fourth quarter.

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are AstraZeneca PLC (AZN); Restaurant Brands Intl In (QSR); Hormel Foods Corp. (HRL); Huntington Bancshares, Inc. (HBAN) and the Focus List deletions are Apollo Global Management Inc (APO); Vertex Pharmaceuticals, Inc. (VRTX); Procter & Gamble Co. (PG); Marriott International, Inc. (MAR).

Stocks rose on Friday morning amid more signs of moderating inflation, as average U.S. gas prices fell below $4 per gallon for the first time since early March. Consumer sentiment data was also positive. The University of Michigan said that its preliminary August consumer sentiment index rose to 55.1, up from 51.5 a month earlier and above the Reuters consensus forecast. The Dow rose 0.7%, the S&P 1.0%, and the Nasdaq 1.4%. Crude oil fell 2% to $92.50 per barrel, while gold rose $4 to $1811 per ounce.

The S&P 500 ran into key resistance last week at the 4,175 region and, so far, the pause looks like it could be a bull flag. The index has come a long way, so we will give the bulls the benefit of the doubt in the short term. Of course, a break of the flag to the upside would bring the next piece of resistance into view at 4,225, which is a 50% retracement of the bear market.

Several weeks ago, we talked about small-caps and, so far, they have held key support. They have steadily underperformed the S&P 500 since February 2021 and the S&P MidCap 400 since January 2021. Both the Russell 2000 (IWM) and the S&P SmallCap 600 (SML) peaked in November 2021 and have been tracing out lower lows and lower highs ever since. As of the June 16 closing low, the IWM has cratered 32% while the SML has given up 26%. Interestingly, the hyper-revenue-growth/no-EPS stocks peaked in late 2020 and early 2021, well before the small-caps. The Nasdaq, QQQs and the S&P 500 all peaked in late 2021/early 2022.

Stocks have struggled in 2Q 2022, with the S&P 500 on its way to a double-digit drop for the period. Absent the rally in recent days, the decline would be closer to 20%. Growth stocks have again been the weakest performers, as sectors such as Technology, Communication Services, and Consumer Discretionary all have lagged the major market indices. The leading sectors were value-oriented, including Energy, Consumer Staples, Basic Materials, and Utilities. The average stock in the Argus Universe of Coverage has declined 13.1% thus far during the quarter, and the median stock declined 12.5%. The average BUY-rated stock dropped 12.6%, while the average HOLD-rated stock fell 14.4%. Will investors continue to favor value in 2022? Will high inflation drive continued outperformance in Energy and Basic Materials? Given interest rates that remain historically low, we expect growth stocks to resume outperformance over time, and think 2022 may be a "one-in-five year" that value leads. Investors seeking value are encouraged to focus on dividends and look for yields in the 3%-4% range. Concerning sectors, our current Over-Weights are Energy, Financial, Healthcare, Industrials, and Basic Materials. Here are the top-10 and bottom-five performers from the Argus Universe in 2Q.

Last week was (yet again) ugly for stocks, and the S&P 500 has now been down in 10 of the past 11 weeks (aka since the last week in March). The current move lower is much steeper than the decline from January to March 14. A steep decline leads to a high level of panic. But the faster prices fall, the sooner stocks can find an intermediate-term bottom. Both breadth and sentiment have been much worse during the current move lower than they were during the move off the highs earlier in the year.

Reading the Tea Leaves on the Fed

Our rating on the Healthcare sector is Over-Weight. Consumers are now more willing to spend on lifestyle enhancements along with necessary spending on life-saving treatments. In addition, the survival of the Affordable Care Act has kept the ranks of insured U.S. citizens above the historical average, further increasing consumer spending on healthcare services and products. Meanwhile, companies with experience in diagnostic testing, vaccines, and antiviral medicines, as well as suppliers of protective equipment and other hospital products, should benefit from efforts to contain the pandemic. The sector accounts for 13.7% of the S&P 500, and includes companies in the pharmaceuticals, medical devices, healthcare services, and insurance industries. The sector is outperforming the market thus far in 2022, with a gain of 1.3% through early April, while the S&P 500 has declined 6%. The following are examples of how we use our analysts' Healthcare sector ideas in our Focus List and Model Portfolios. All stocks are rated BUY at Argus.

Everyone is debating how quickly the Fed will raise interest rates. But few are talking about U.S. debt levels that have grown over the past 10 years. Total U.S. debt is now more than 120% of GDP, according to the Office of Management and the Budget. This is the highest level since World War II. In the 1970s and 1980s, the debt/GDP ratio was consistently in the 30%-40% range, and moved up toward 60% by 2000. Debt soared around 2010, as the government spent aggressively to fight the Great Recession and rekindle growth (which, according to Keynes, is what a government is supposed to do). But despite more than 10 years of economic growth prior to the pandemic, debt increased as a percentage of GDP. And now, reflecting the fiscal spending allocated to fight the impact of COVID-19, debt levels have surged further. This is not a problem to be fixed today. After all, interest rates are low on an historical basis, with interest expense accounting for 1.5% of GDP versus the historical average of 1.7%. The high was 3.2% in 1991. But politicians should establish a plan to address the issue in the next 10-15 years. If the problem is not solved, the situation could result in persistent hyperinflation and a weak dollar, which would send interest rates higher and cut into economic growth and equity valuations.

Wednesday was just an average "Fed Day." Move on folks, there's nothing to see here! At about 10:18 a.m., the S&P 500 was up 85 points or 2%. Market breadth was very strong and it looked like we might get a very important 80%+ day. The index then flattened out and lost ground, and then actually went negative following the release of the Fed minutes. But in the blink of the eye, the index was back -- ultimately finishing 95 points higher. So we got an 80%+ breadth day.

Argus has published its latest Portfolio Selector, which features its popular Focus List. Each month, Director of Research Jim Kelleher, CFA, surveys the team of Argus Research industry analysts for their timeliest recommendations out of the company's fundamental universe of approximately 500 stocks. The Focus List typically includes 30 stocks: turnover is high, as Director of Research Kelleher typically adds three or four new stocks per month. Below are the latest additions, all of which are rated BUY at Argus Research.

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are Linde Plc (LIN); Sysco Corp. (SYY); Target Corp (TGT); Vertex Pharmaceuticals, Inc. (VRTX) and the Focus List deletions are DuPont de Nemours Inc (DD); Zoetis Inc (ZTS); Lululemon Athletica inc. (LULU); Tyson Foods, Inc. (TSN).

The stock market continues to be whipped by hourly headlines. But in the end, prices are still weak and are approaching some key intermediate-term levels. The S&P 500 made a new corrective closing low near the 4,300 area, a level we have talked about based on a measured move and a series of intraday lows in late January. The intraday low for the index was 4,267, just above the January 24 intraday low of 4,223. The QQQs bounced off their corrective intraday lows near 334 and also made a marginal new closing low.

January Jitters: Our Monthly Survey of the Economy, Interest Rates, and Markets

Despite wild intraday gyrations in the stock market last week, the S&P 500, the Nasdaq, and the Nasdaq 100 were all basically flat for the week. But at the end of it all, that was an improvement relative to recent weeks. The market saw a huge rally on Friday, with the S&P 500 soaring 2.4%, while both the Nasdaq and QQQs rocketed 3.1% higher. It was the largest daily gain for the "500" since June 2020 and the biggest jump for the other two indices since March 2021.

West Texas Intermediate (WTI) hit $80.24 intraday on Thursday. On the upside, there is chart resistance in the $80/$85 region from the congestion a few months back. A 78.6% FIBO retracement of the decline from November until early December is near $80. A Fibonacci extension based on the ABC reversal that crude traced out in December targets the $83 area, with further extensions starting at $87.

The S&P 500 pullback that started on November 22 continues -- and with it, frustrating and choppy action. The "500" fell right to its 10-day exponential average as well as a 50% retracement of the rally on Tuesday and bounced 28 points off the 4,606 low. Unless the recent low of 4,495 is busted, the index is in good shape as far as price is concerned.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

The stock market was mixed last week, with Tech stocks outperforming blue chips by a sizeable margin for the second straight week. During Friday's session, the Dow Jones Industrial Average fell 75 points, or 0.2%. The S&P 500 was down 0.03%, and the Nasdaq Composite was up 0.21%. For the week, the DJIA was down 87 points, or 0.24%, the S&P 500 was up 0.58%, and the Nasdaq Composite was up 1.55%. Year-to-date, the DJIA is up 15.56%, the S&P 500 is up 20.75%, and the Nasdaq Composite is up 19.21%.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

The Vickers Top Buyers & Sellers is a daily report that identifies the five companies the largest insider purchase transactions based on the dollar value of the transactions as well as the five companies the largest insider sales transactions based on the dollar value of the transactions.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

The Vickers Top Buyers & Sellers is a daily report that identifies the five companies the largest insider purchase transactions based on the dollar value of the transactions as well as the five companies the largest insider sales transactions based on the dollar value of the transactions.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

Stocks were nearly flat on Wednesday morning as investors wait for the Fed's policy decision. Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,572,000. This is 3.6% above the revised April estimate of 1,517,000. Single-family housing starts in May rose 4.2% to 1,098,000 from April's revised figure of 1,054,000. The Dow fell 0.1%, the S&P was flat, and the Nasdaq was up 0.1%. Crude oil traded near $73 per barrel, while gold rose $4 to $1860 per ounce.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

The Day Traders Strike Back: Our Monthly Survey of the Economy, Interest Rates, and Markets

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are Anthem Inc (ANTM); Activision Blizzard Inc (ATVI); Coca-Cola Co (KO); International Business Machine (IBM) and the Focus List deletions are Procter & Gamble Co. (PG); Electronic Arts, Inc. (EA); CIENA Corp. (CIEN); Vertex Pharmaceuticals, Inc. (VRTX).