Research Reports

In this edition, U.S. Infrastructure Spending Boosts CRH, Auto Maintenance Is Far From Worn-Out, Which Is Welcome News for Bapcor, Spotify's Good Spot, and Paychex, Nike, and Workday

Stocks rose on Friday morning, paring early losses after new data showed further signs of moderating inflation. The Commerce Department reported that its personal consumption expenditures price index rose 5.5% from the prior year in November, slowing from 6.1% growth in October and in line with the consensus estimate. The core PCE, excluding food and energy costs, rose 4.7% on a year-over-year basis, down from a prior reading of 5.0%. The Dow rose 0.4%, the S&P 0.5%, and the Nasdaq 0.3%. Crude oil rose more than 3% to $80 per barrel, while gold rose $11 to $1806 per ounce.

The Federal Reserve's favorite inflation indicator, the PCE Price Index, will be released by the BEA today. The PCE Index differs from the better-known Consumer Price Index in that its components are more variable and are quicker to reflect real-time pricing fluctuations. In the most recent report, from October, PCE inflation was reported at 6.0% (the latest CPI report, from November, had inflation at 7.1%). At Argus, we forecast a rate of 5.7% for the November PCE Price Index. Core PCE, which removes volatile food and energy prices, was 5.0% in the latest month. We expect the Core PCE to tick lower to 4.8% this month. We track 21 inflation measures on a monthly basis. On average, they are indicating that prices are rising at a 4.7% rate year-over-year, down from 5.2% last month and from 8.7% six months ago. Focusing on core inflation, our reading is 4.0%, down slightly from our 4.2% reading last month. We note some movement among our components. Producer Prices appear to be cooling off, with substantial declines in PPI Intermediate Prices for Processed and Unprocessed Goods. The rate of wage increases also is slowing down. Looking ahead, investors are expecting that the Federal Reserve's series of rate hikes will ultimately tame inflation, with the three-year forward expectation rate now down to 3.0% and the five-year forward expectation rate at 2.1%.

The 10-year Treasury yield held an important area near 3.5% and, in the near term, is approaching another key level in the 3.7%-3.8% zone. This is the underside of the trendline off the December lows, as well as the location of the declining 50-day moving average. It is still possible yields are tracing out a larger head-and-shoulders (the first was very small), but need to take the neckline out at 3.5% to complete the pattern.

Stocks fell sharply on Thursday even after paring losses in late trading. The selloff was driven in part by an upward revision in third-quarter GDP, which raised prospects for continued aggressive Fed rate hikes. Investors also weighed a weak earnings report and disappointing guidance from Micron Technology, and weekly employment data. The Labor Department said that first-time claims for state unemployment benefits rose by 2,000 to 216,000 for the week ended December 17, below the Reuters consensus of 222,000. The Dow fell 1.05%, the S&P 1.45%, and the Nasdaq 2.18%. Crude oil traded near $78 per barrel, while gold fell to $1801 per ounce.

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.

The Vickers Top Insider Picks is a daily report that utilizes a proprietary algorithm to identify 25 companies with compelling insider purchase histories based on transactions over the past three months.

Stocks fell sharply on Thursday morning, reversing Wednesday's short-lived rally. The selloff came after the Commerce Department raised its estimate of third-quarter GDP growth to 3.2% from a prior 2.9% - raising concerns about further aggressive Fed rate hikes. On the earnings front, Micron Technologies fell 4% after the company posted a wider-than-expected adjusted loss in fiscal 1Q, issued weak second-quarter guidance, and announced substantial job cuts. The Dow fell 1.4%, the S&P 1.8%, and the Nasdaq 2.6%. Crude oil fell slightly to $78 per barrel, while gold fell $21 to $1805 per ounce.

Dividend income, an important element of total return, is often overlooked amid gyrations in the stock market. Between 1930 and 2012, dividend income accounted for 42% of the total return of the S&P 500, according to Hartford Funds. And that's just the average. In some decades, dividends accounted for more than 50% of total returns and even 100% of returns. More recently, dividends have accounted for 15%-20% of returns. Still, in 2018, dividend payments softened the blow when most market indices declined as the Federal Reserve hiked rates. The pattern was repeated in 2022 as well. Not all dividends are created equal, though, and it is important to understand the difference between the two main categories: high-yield stocks and dividend-growth stocks.

The U.S. Bureau of Economic Analysis this morning announced that its "third" estimate for 3Q22 GDP growth was a rate of 3.2%. As is typically the case, the report indicated areas of strength and weakness in the economy. On the positive side, the consumer appears to be in good shape, with Personal Consumption Expenditures expanding at a 2.3% pace, driven by spending on services. Companies continue to invest in R&D projects and software, and Investments into Intellectual Property advanced at a 6.8% rate. Exports -- led by energy to Europe -- rose at a 14.6% clip. On the downside, Residential Investment declined 27%; Consumer Spending on Durable Goods fell 0.8%; and Consumer Spending on Nondurable Goods was flat. The GDP report also includes an inflation measure, the PCE Price Index. This index, excluding food and energy, rose at a 4.7% pace, well ahead the Federal Reserve's inflation target of 2.0%. While the economy is evidently still expanding, as companies continue to generate new jobs, the U.S. GDP growth trajectory is likely to turn negative in 2023 as the Federal Reserve continues to raise interest rates. We can already see the impact of the early Fed rate hikes on the residential sector.

We all know where money was made in 2022, as well as the sources of relative and absolute performance. Energy (XLE) has had another stellar year, up 62% with six days left. Four sectors were basically flat (Utilities, Staples, Healthcare, and Industrials), with three of those sectors defensive. Financials and Materials are off 11%, but have beaten the S&P 500. Communication Services, Discretionary, Real Estate, and Technology all have given up 26% to 38%.

Our End-of-Year Note to Clients

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.

The Vickers Top Insider Picks is a daily report that utilizes a proprietary algorithm to identify 25 companies with compelling insider purchase histories based on transactions over the past three months.

PubMatic is one of the leading supply-side platforms, or SSP, providers in the digital advertising technology market. SSPs help publishers, which supply digital ad inventory, better manage their inventory, selling a high percentage of their inventory (increase the ad fill rate) and maximizing revenue per ad sold (optimize yield). PubMatic generates revenue mainly via taking a piece of the ad sales that it enables. Buyers on the platform include intermediary buyers, such as demand-side platforms, or advertisers and ad agencies directly. Given the growth in overall digital advertising, more publishers and advertisers are adopting programmatic (or automated) buying and selling, driving the firm’s success in attracting more inventory.

Stocks rallied on Wednesday morning following earnings reports from Nike and FedEx and new consumer confidence data. Nike shares rose more than 13% after the company reported better-than-expected fiscal 2Q results and progress in clearing excess inventory. FedEx rose more than 4% after posting above-consensus earnings and pledging aggressive cost cuts. The Conference Board said that its consumer confidence index rose to 108.3 in December, up from a revised 101.4 in November and above the Bloomberg consensus forecast. The Dow rose 1.5%, the S&P 1.4%, and the Nasdaq 1.5%. Crude oil rose more than 2% to $78 per barrel, while gold traded near $1826 per ounce.

The housing industry was an important contributor to the U.S. economic recovery from the pandemic, but recent high prices and high interest rates have cooled the market. The National Association of Realtors recently reported that existing home sales in October 2022 totaled 4.4 million at a seasonally adjusted annual rate, down 32% from the rate at the beginning of the year. The Commerce Department reported that new one-family homes were selling at a 632,000/year pace in October -- down from 831,000 in January. Meanwhile, a leading indicator for the industry, housing permits, has turned lower as well. According to the Census Bureau, permits were being authorized in October at a 1.5 million annual rate, down from 1.9 million in March. Housing prices are finally starting to cool. The S&P/Case-Shiller National Home Price Index for September 2022 showed that the average price has risen "only" 10% year-over-year -- and is down 3% from the peak in June. The high prices and high mortgage rates (the average rate on a 30-year fixed-rate mortgage was recently 6.33%) have boosted housing inventories. According to the U.S. Census Bureau there currently is an 8.9-month supply of existing homes for sale (the typical range is 4.5-7.5 months). Until pricing pressures ease further, we do not believe that the housing sector will be supportive of U.S. economic growth.

We have written about the heavily concentrated weighted indices as well as exchange traded funds (ETFs), but less about what comprises ETFs -- especially for the 11 sectors of the S&P 500. One of the most-egregious holdings group is in the Consumer Discretionary (XLY) sector. (And by the way, because of its holdings, XLY was the only sector to hit a bear-market low on Tuesday, despite the fact that consumer seems to be in pretty good economic shape).

There's an old saying about the stock market: 'The mid-December lows are the only free lunch on Wall Street.' In addition, December is strong historically. Unfortunately, the current market is not following the script. Indeed, you can throw all the studies in the trash during a bear market.

The Vickers Top Insider Picks is a daily report that utilizes a proprietary algorithm to identify 25 companies with compelling insider purchase histories based on transactions over the past three months.

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.