Monday Tee Up: A Big Week

Our bond/stock asset-allocation model is indicating that bonds are the asset class offering the most value at the current market juncture, as interest rates have risen. But stocks are not seriously overvalued, and the recent decline in the benchmark 10-year government bond yield has improved equity valuations. Our model takes into account levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks, of 0.15 sigma, with a standard deviation of 1.0. The current valuation is a 0.76 sigma premium for stocks, inside the normal range and down from 0.98 last month. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is 16.7, within the normal range of 10-21 and down from 22 a year ago. The current S&P 500 dividend yield of 1.5%, while below the historical average of 2.9%, is up from an ultralow 1.2% as recently as 2021. We expect the results from our valuation model to improve, as interest rates start to decline next year and EPS growth picks up. Based on the current valuation levels, as well as interest rate and earnings forecasts, we have called for a recovery in stock prices in 2023 from bear-market lows. Our current recommended asset-allocation model for moderate accounts is 67% growth assets, including 65% equities and 2% alternatives; and 33% fixed income, with a focus on core opportunistic segments of the bond market. On duration, we recommend focusing on the short end of the curve.

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.

Stocks rose on Wednesday morning as investors awaited the Fed's afternoon policy statement and follow-up comments from Chairman Jerome Powell. Given the impact of previous rate hikes and high Treasury yields, the Fed is widely expected to hold rates steady while leaving open the possibility of a further increase in December or in early 2024. The Dow rose 0.4%, the S&P 0.5%, and the Nasdaq 0.6%. Crude oil rose nearly 3% to $83 per barrel, while gold traded near $1994 per ounce.

Stocks fell again on Thursday morning, a day after a sharp selloff prompted by the Fitch downgrade of U.S. government debt. On the earnings front, Qualcomm shares dropped 10% after the chipmaker reported mixed fiscal 3Q results and offered disappointing 4Q guidance. PayPal also fell sharply on concerns about weak operating margins and rising loss provisions. The Dow fell 0.3%, the S&P 0.5%, and the Nasdaq 0.5%. Crude oil rose 1% to $80 per barrel, while gold fell $5 to $1971 per ounce.

Stocks fell on Tuesday morning on continued concerns about a potential U.S. government default, as investors hoped for positive signs from a meeting between President Biden and House Speaker Kevin McCarthy. On the earnings front, Airbnb and Occidental Petroleum will report results after the close, and Disney will report on Wednesday. The Dow fell 0.2%, the S&P 0.4%, and the Nasdaq 0.6%. Crude oil traded near $72 per barrel, while gold rose slightly to $2035 per ounce.

Stocks fell on Wednesday morning ahead of the Fed's policy statement, as investors weighed more 4Q earnings reports and new labor market data. Payroll provider ADP said that U.S. companies added 106,000 jobs in January, down from a revised 253,000 in December and well below the Reuters consensus forecast of 178,000. On the earnings front, AMD rose more than 7% after the company posted strong 4Q results, helped by sales of data center chips, and pointed to a strong second half in 2023. Stryker shares also rose strongly following above-consensus 4Q sales and earnings and positive 2023 guidance. The Dow fell 0.7%, the S&P 0.3%, and the Nasdaq 0.2%. Crude oil fell 1% to $78 per barrel, while gold traded near $1945 per ounce.

After a mere two days above its bear-market trendline (which goes back to early January of 2022), the S&P 500 pulled back on Monday right to the trendline. This is called a backtest, where prior resistance becomes support. A successful backtest would be quite bullish. But a failure and a drop below the 200-day at 3,955 and trendline support near 3,925 (looking out a week) could spell trouble.

Bear markets grind-up investors and spit them out. On many fronts -- like the highest-beta growth stocks with no earnings, the meme stocks, the cryptocurrency market, and the most-loved and over-owned mega-cap stocks -- the carnage has been terrible. Indeed, in many cases, catastrophic.

Stocks finished mixed on Thursday as investors weighed earnings reports from a range of major companies, including Caterpillar, Merck, and McDonald's, along with new GDP and employment data. The Commerce Department said that the U.S. economy expanded at a 2.6% rate in the third quarter, a reversal after two quarters of declines, helped by stronger-than-expected net exports. On the employment front, first-time claims for state unemployment benefits rose by 3,000 to 217,000 for the week ended October 22, but were below the Reuters consensus estimate of 223,000. Continuing claims rose to 1.438 million, up from 1.383 million a week earlier and above the consensus forecast. The Dow rose 0.61%, the S&P fell 0.61%, and the Nasdaq fell 1.63%. Crude oil rose 1% to $89 per barrel, while gold fell $3 to $1666 per ounce.

Stocks rose on Monday morning as investors awaited key inflation data later in the week, including the July consumer price index on Wednesday. The current Bloomberg consensus calls for a year-over-year increase of 8.7% in the CPI, down from 9.1% in June due in part to lower gas prices. On the earnings front, Tyson shares fell more than 9% after the company reported below-consensus fiscal 3Q earnings, hurt by higher feed costs and the impact of rising meat prices on consumer spending. The Dow rose 0.8%, the S&P 0.8%, and the Nasdaq 1.1%. Crude oil fell slightly to $88.50 per barrel, while gold rose $13 to $1804 per ounce.

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 Home Depot, Inc. (HD); JPMorgan Chase & Co. (JPM); Palo Alto Networks Inc (PANW); Lilly(Eli) & Co (LLY) and the Focus List deletions are Williams-Sonoma, Inc. (WSM); U.S. Bancorp. (USB); Western Digital Corp. (WDC); IQVIA Holdings Inc (IQV).

Stocks fell on Wednesday morning ahead of the Federal Reserve's afternoon policy statement and comments from Fed Chair Jerome Powell. On the employment front, payroll provider ADP said that U.S. companies added 247,000 payroll jobs in April, down from 479,000 in March and below the Bloomberg consensus forecast of 383,000. The Dow fell 0.3%, the S&P 0.6%, and the Nasdaq 1.5%. Crude oil rose more than 3% to $106 per barrel, while gold dropped $3 to $1868 per ounce.

Stocks edged higher on Tuesday morning after a strong rally on Monday as investors weighed new manufacturing and employment data. The Institute for Supply Management said that its national factory index fell to 57.6 in January, down from 58.8 in December and just above the Bloomberg consensus forecast of 57.5. In its JOLTS report, the Labor Department said that job openings rose to 10.925 million at the end of December, up from 10.775 million a month earlier and well above the consensus forecast of 10.3 million. The Dow rose 0.1%, the S&P 0.1%, and the Nasdaq 0.3%. Crude oil fell below $88 per barrel, while gold rose $9 to $1806 per ounce.

Pricing pressures are percolating at the producer level, and mainstream measures of inflation are elevated as well. To address the issue, the Federal Reserve has raised its game and is more-rapidly pulling back the support it provided to the economy during the pandemic. We track 20 inflation measures on a monthly basis. On average, they indicate that prices are rising at a 7.2% rate. This is high, but lower than last month's reading, which was 7.9%. Drilling down to core inflation -- which we obtain by averaging Core CPI, market-based PCE Ex-Food & Energy, the five-year forward inflation expectation rate, and the 10-year TIPs Break-even Interest Rate -- our reading is 3.6%, with the all-important five-year target rate at 2.0%. While inflation has been elevated for the past several months, the markets lately seem to have lost confidence that the central bank can bring prices under control in the near term. The Federal Reserve's inflation forecasts now call for a core inflation reading of 2.7% in 2022. The market does not expect the Fed to hit its 2022 target; the one-year Forward Expected Inflation rate, according to the Federal Reserve Bank of New York survey, is 6.0%.

Market breadth has made a nice recovery since bottoming on December 1. We are seeing good price action from the S&P 500 following the recent breakout to all-time highs, which is a bullish sign. On the S&P 500, 71% of stocks are above their 50-day average (all breadth data as of the 12/28 close), up from an oversold 29% on 12/1/21. Some 74% of "500" stocks are above their 200-day, up from 54% (which was the lowest percentage above their 200-day since 11/2020).

Pricing pressures are hot, especially at the producer level. After months of below-target inflation readings, mainstream measures of inflation are rising as well, compared to the deflationary lows of the pandemic. Though Federal Reserve Chairman Powell has said that the central bank is willing to let inflation rise above its 2% target in exchange for a continued decline in unemployment, the Fed has already started to pull back some of its support for the economy. We track 19 inflation measures on a monthly basis. On average, they indicate that prices are rising at an 8.1% rate, above last month's reading, which was 7.5% (as some producer price gauges are reheating). But drilling down to core inflation (which we obtain by averaging Core CPI, market-based PCE Ex-Food & Energy, the five-year forward inflation expectation rate, and the 10-year TIPs Break-even Interest Rate), our reading is 3.3%, with the all-important five-year target rate at 2.4%. Even if the Federal Reserve has let near-term inflation escalate, the markets still seem to have confidence that the central bank can bring prices under control over time. The Fed's inflation forecasts now call for a core inflation reading of 4.2% in 2021 and 2.2% in 2022. Right now, the market does not expect the Fed to hit its 2022 target.

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.

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 Host Hotels & Resorts Inc (HST); NXP Semiconductors NV (NXPI); Western Digital Corp. (WDC); IQVIA Holdings Inc (IQV); American Electric Power Co Inc (AEP) and the Focus List deletions are Weyerhaeuser Co. (WY); Dell Technologies Inc (DELL); Qorvo Inc (QRVO); Anthem Inc (ANTM).

This pick list highlights constituents of the Morningstar US Mid Cap Index that we believe offer investors the best risk-adjusted return prospects. The market capitalization range for U.S. mid-caps typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market.

The stock market moved higher last week during the busiest days of earnings season. Tech stocks far outperformed blue chips, though a portion of the outperformance was attributable to Tesla, as its stock is included in the S&P 500 and Nasdaq Composite, but not the DJIA. During Friday's session, the Dow Jones Industrial Average increased 89 points, or 0.25%. The S&P 500 was up 0.19%, and the Nasdaq Composite was up 0.33%. For the week, the DJIA was up 143 points, or 0.40%, the S&P 500 was up 1.33%, and the Nasdaq Composite was up 2.70%. For the YTD, the DJIA is up 17.03%, the S&P 500 is up 22.61%, and the Nasdaq Composite is up 20.25%.

Stocks rose on Thursday, led by the Financial and Energy sectors, as investors weighed new employment data. First-time jobless claims fell to 385,000, down from 399,000 a week earlier but slightly above the consensus forecast. Continuing claims fell to 2.930 million, down from 3.296 million a week earlier and below the consensus forecast of 3.255 million. The continuing claims reading was the first below 3 million since March 2020. The data came ahead of the government's July employment report on Friday morning. The Bloomberg consensus calls for the addition of 865,000 new payroll jobs after an increase of 850,000 in June, and a slight decrease in the unemployment rate to 5.7%. The Dow rose 0.78%, the S&P 0.60%, and the Nasdaq 0.78%. Crude oil rose to $69 per barrel, while gold fell $8 to $1807 per ounce.

Last week, the market took worrisome inflation data in stride, and the S&P 500 established an all-time high. Recall that in early May, stocks were staggered by CPI data that included an annual change of 4.2% in April consumer prices. Well, in early June, consumer prices for May were reported up by 5.0% -- but a broad-based rally ran right over that number.

Last week in this space, we detailed stubbornly negative, but grudgingly improving, insider sentiment. The easy path this week would be to say that conditions are little changed. And in the big picture, that is true. But there are some interesting highlights in the insider-transaction data from Vickers Stock Research this week.

April 2021 lived up to its billing as the best stock month of the first half. During April, the S&P 500 appreciated 5.2%, better than any month this year; March was closest with a 4.2% gain. Through the end of the fourth month, the S&P 500 is up 11.3% year-to-date.

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 Lazard Ltd. (LAZ); KLA Corp. (KLAC); Silk Road Medical Inc (SILK); Pinterest Inc (PINS) and the Focus List deletions are Citizens Financial Group Inc (CFG); Moderna Inc (MRNA); Verizon Communications Inc (VZ); Western Digital Corp. (WDC).

The nation spent last week transfixed by the deep freeze across most of the country, the power and water woes in Texas, and the prospects for more storms ahead. Quietly and seemingly in the background, the stock market is showing signs of calming.

The major indices fell on Friday morning amid continued volatility in heavily shorted stocks and new COVID-19 vaccine trial results from Johnson & Johnson. J&J said that its vaccine candidate was 66% effective in preventing the spread of the virus globally (72% in the U.S.), well below the high bar set by the Pfizer/BioNTech and Moderna vaccines. However, the lower efficacy may reflect the increased prevalence of new variants of the virus during the J&J trial. On the positive side, J&J said that the vaccine was 85% effective in preventing severe cases of the disease 28 days after vaccination and 100% effective in preventing hospitalization. The Dow fell 1.3%, the S&P 1.3%, and the Nasdaq 1.2%. Crude oil traded near $53 per barrel, while gold rose $20 to $1861 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 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.

Stock prices, as expressed by the S&P 500, are near all-time highs and above fair value (which our model pegs at closer to 3000 due to the earnings weakness in 2020). Our valuation model for the stock market takes into account factors such as stock prices, five-year normalized earnings (three historical years, two forward-looking), GDP, inflation, and T-bond and T-bill yields. We note that stocks rarely trade right at fair value. Since 1960, on average, the index has traded at a tight 2% above fair value, but the standard deviation to the mean is 16%. As such, we normally expect the S&P 500 to trade between 14% undervalued and 18% overvalued. At current prices, the stock market is approximately 15%-20% above fair value, implying that investors are quite optimistic about equities in the coming months. While bullish for 2021, we'd feel better about the outlook for stronger stock returns if valuations were not so stretched. Several factors could improve valuations: a pullback in stock prices, lower bond yields, or better earnings. Still, given the current fully valued level of the market, disappointments could be painful (and buying opportunities) given solid fundamentals of low interest rates and growing earnings next year.

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 Trane Technologies plc (TT); Linde Plc (LIN); Western Digital Corp. (WDC); Peloton Interactive Inc (PTON) and the Focus List deletions are PPG Industries, Inc. (PPG); Roper Technologies Inc (ROP); Snap Inc (SNAP); TJX Companies, Inc. (TJX).

This pick list highlights constituents of the Morningstar US Mid Cap Index that we believe offer investors the best risk-adjusted return prospects. The market capitalization range for U.S. mid-caps typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market.

Stocks rose on Thursday, rebounding from Wednesday's selloff but also giving up some of their gains late in the session. The Commerce Department reported strong growth in 3Q GDP, which rose at a better-than-expected 33.1% annualized rate. Unemployment claims, still high by historical standards, also trended lower. First-time unemployment benefit claims fell from the prior week to 751,000, below the consensus forecast. Continuing claims totaled 7.756 million, also down from the prior week and below consensus. The Dow rose 0.52%, the S&P 1.19%, and the Nasdaq 1.64%. Crude oil fell more than 3% to $36 per barrel, while gold fell $13 to $1866 per ounce.

This pick list highlights constituents of the Morningstar US Mid Cap Index that we believe offer investors the best risk-adjusted return prospects. The market capitalization range for U.S. mid-caps typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market.

Stock Market Wobbles Toward the Election

Stock Market Wobbles Toward the Election