You know that saying “sell in May and go away?” Although it doesn’t rhyme, it may be sell in June and find a beach somewhere.
The Dow Jones Industrial Average was down for the eighth straight session, which underscores specific issues with multination names that are getting the vast majority of their profit growth from outside the United States.
- Trade Battles
- Stronger Dollar
- Weaker Global Economy
On the other hand, we have seen a magnificent rally and numbers records for the NASDAQ and Russell 2000.
Even Thursday, while there were 83 new highs versus 81 new lows on the NYSE, we saw 154 names on NASDAQ close at new highs against only 58 at new lows.
Still, some things are bothering me and hurting my model portfolio.
Yellow Flags
Construction
S&P Material sector is down for the year, as there have been lots of false starts and an absence of a catalyst.
U.S. construction names are getting hammered. This was a big investment theme of mine coming into the year, with or without a massive infrastructure plan from Washington.
Financials
I have been underweight financials all year long, but the mavens of Wall Street keep saying this is the place to be, but something is wrong.
The S&P Financial sector is off for the year, but that doesn’t tell the story of the carnage in big banks like Goldman, which is off more than 10%.
Booster Shot?
Maybe, the banks will get a booster shot from news out after the yesterday’s close.
I know this sounds more like the latest movie from Dwayne Johnson, but not even the Rock could survive the circumstances assumed in the Federal Reserve’s dire hypnotical economic downfall scenario.
The so-called Federal Reserve Stress Test are broken into three hypotheticals:
-Baseline
-Adverse
-Severely Adverse which includes:
Recommended
- Global recession
- US unemployment Rate move above 10%
- Steepen Yield Curve
- Stocks -65% into 2019
- VIX move above 60%
- Housing values -30%
- Commercial real estate -40%
After the bell, the Fed released its findings on the “severely adverse” test, and surprise, all 35 banks passed. We’re talking hundreds of billions in losses and blood in the streets, but the big banks would be fine.
I don’t buy that at all, but now is a good time to get them all to pledge they wouldn’t ask for or accept a taxpayer bailout.
Meanwhile, this news will be followed with the Fed allowing banks to buy back stock and hike their dividends. I think that’s a reasonable use of cash, and way to reward investors. I also expect there will be wage increases, but what I’d really like to see is for the big banks to go back to banking.
The smartest guys in the room that did all that divine work have gotten so far away from the basics, they need outrageous market volatility to make money.
The S&P Financial Sector is down 2.5% in 2018, but names like Goldman Sachs, which is down more than 10%, have been the missing factor.
Consumers to the Rescue
Yesterday, it was Kroger (KR) defying the odds and rallying after its death was called in the aftermath of the Amazon/Wholefood’s deal. Of course, Kroeger was written off more than a decade ago when the world thought Walmart would put them out of business.
The news just underscores my recent observations and one of my big investment themes for 2018.
Recent Observations from Commentary
I have been pounding the table on the resurgence of the American consumer juxtaposed to consumer stocks, which were all getting hammered to the point of absurdity. Below are just some of my more recent comments:
6/5/2018 - Confident Shoppers - Not Ready to be Owners Yet
Although tech will grab the headlines because of billion-dollar merges and new record highs, consumer stocks are still killing it with a stealth rally. I have been pointing this out for weeks. Even consumer discretionary winners Amazon (AMZN) and Netflix (NFLX) couldn’t match percentage gains for Under Armour (UAA), Target (TGT), Ulta Beauty (ULTA), and Kohl’s (KSS).
I believe business investment is a major difference-maker, especially when it comes to a strong economy versus a pedestrian economy. In fact, consumers must step up despite anxiety earlier in the year.
I know the experts are worried about higher gas prices and the spike in products from trade negotiations and tariffs, but I think the warning is currently overdone. The fact is that the economic momentum is substantially ahead of those fears.
That said, investors aren’t nearly as confident in the role of an investor as they are as consumers.
6/6/2018 - Consumers: Alive and Shopping
“The reports of my death are greatly exaggerated.”
-Mark Twain
Then there’s the group no one in the financial media is talking about (except me), and that’s consumer stocks, especially discretionary names.
I have raved about the resilience of consumer confidence, especially the present condition component that’s holding at a 17-year high. Wall Street calls these surveys and polls “soft data,” but those emotions are morphing into reality, otherwise known as “hard data.”
Forget what the experts are saying, people are spending money at brick-and-mortar stores. Those companies that have survived and are figuring it out, while their shares have had blockbuster performances that have dwarfed even Amazon (AMZN) and Netflix (NFLX).
Companies up to more than 100% from the 52-week low:
Yesterday, G-III Apparel Group led the way (please read the story of company’s founder)
Macy’s (M)
Kohl’s (KSS)
Foot Locker (FL)
Restoration Hardware (RH)
There are a lot of deeply oversold names in retail that look compelling. On that note, choose carefully. I like The Children’s Place (PLCE) and Gap, Inc (GPS).
June 15 - It’s the Economy
There is major news about the American consumer as retail sales soar. As I mentioned yesterday, the key takeaway is that the consumer is leaving the house, as department store sales increase faster than the Internet sales and restaurant sales pop, while grocery stores fall flat.
The report was strong enough to get the Atlanta Fed to up its modeling for its current Gross Domestic Product (GDP) to 4.8%.
Winners!!!
We saw all these observations come together in ways that are rewarding investors.
- Darden earnings report sending stock higher.
- Kroger earnings results sending stock higher.
- Dollar General announces search for managers in 44 states.
Brick and Mortar stocks have been on a tear underscored by the surge in the XRT Index.
Today’s Session
The market is going to get a reprieve this morning, but the test isn’t how we open, but how we close.
I still want investors to focus on fundamentals, but that doesn’t mean ignoring the message of the market. Right now, the message is uncertainty ahead of trade tensions, earnings season (got a warning from Red Hat after the bell) and general angst, also known as fear of Murphy’s Law.
But you have learned to buy this kind of dips before, and I think it’s still holds. The Federal Reserve just said the banks could survive Armageddon, so why worry?
Join the conversation as a VIP Member