04 Apr Capital 19 Catch-Up
Weekly Index Movement
Aussie All Ords +1.2%
Well, that was a super-volatile week but when the dancing was over and the lights came on, the major indexes finished around flat If you hit the snooze button last weekend and woke up this weekend, you really didn’t miss much.
Unless you’re into home builders, which we are not. Higher interest rates are crushing their souls. The SPDR Homebuilders fund (XHB) is down 26% year to date (vs a 4.6% decline of the S&P 500), giving some observers the sense that the economy is slowing down on the edges.
The first quarter of 2022, which ended Thursday, was a drag, with the DJIA down 4% and the Nasdaq 100 down 9%.
The growth half of the S&P 500 (IVW) fell 6.6% in the first quarter while the value half (IVE) fell just 0.3%. That is a massive differential in favor of value.
The mega-caps with the fattest dividend yields (DVY) actually rose 5.25% in the first quarter. … And the similar SPDR S&P 500 High Dividend fund (SPYD) rose 6.7% in the quarter, only nicking the zero line briefly on three days in the three month span.
The bounce in stock prices in the second half of March surprised just about everyone.
It might seem strange for stocks to be climbing higher with inflation raging, interest rates soaring, a war in Ukraine and the pandemic still killing 1,000 people a day. But big stock market moves are about changes in the narrative.
Many professional money managers feel they are being pulled into stocks by default. Bonds are in a bear market as interest rates rise. With high single-digit inflation, the return on cash is negative. It makes sense that stocks with hefty dividend yields and excellent growth rates are in high demand.
With inflation running rampant investors are forced to put their capital to work, just to keep pace with inflation.
The lastest Australian inflation figure was +6.2% so unless you are generating a return of over 6% per year, you are losing future purchasing power. Or, you could say you are guaranteeing a loss of 6% if you leave your money in cash verses the chance of making a positive return if you put it to work in the markets.
But where do you put it to work? You don’t want bonds because bond prices drop as interest rates rise. You could purchase real estate but right now feels like the top of that market. Which pretty much only leaves stocks.
Which stocks do you buy, well, you play it safe and buy big companies that pay consistent dividends because those dividends mean the stock prices show more stability than other sectors.
And that narrative is exactly what investors have been doing in 2022.
Which is why we thought we would highlight two Australian dividend opportunities for you.
In other news, oil fell below the psychological $100 per barrel as the International Energy Agency member states prepare to discuss releasing oil from emergency reserves, following in the footsteps of the US, which plans to release 1 million barrels a day for six months.
It sounds like we might have seen the peak oil price for the short-term future. But oil isn’t going back to $60 a barrel, no matter how many reserves they release.
The fact is, world oil demand has not changed. But by taking Russian oil away there is less supply. Very basic economics says the Oil price will increase. We probably have a war premium built into the current price but higher oil prices are here to stay.
That is why we continue to favour the Energy sector.
The US released employment numbers on Friday, and although they were not as positive as expected, the unemployment rate still dropped to 3.6% in March after falling to 3.8% in February. This is among the lowest readings in the last 60 years.
Looking inside this report, wages growth caught our eye. The March annual wage growth came in at +6.7%. The last time wage growth was this high was in the 1970s/early 1980s.
What this means is – the economy is running so strongly that even as more people join the labour force, the incremental supply of labour is still insufficient to satisfy demand and wage pressure remains.
Which helps to explain why stock prices continue to rise.
Q1 earnings report season starts next week, and the good news is that Wall Streets analysts are (again) too pessimistic.
They think the S&P500 index will earn $52 per share. They are wrong.
Last year, earnings grew every single quarter, from $49/share in Q1 to $55/share in Q4
Quite why the analysts think earnings have dropped from $55/share down to $52/share in this most recent quarter baffles us.
The employment and GDP numbers show the strength of the economy and inflation is actually good for earnings power at large companies.
Our bet is earnings surprise to the upside once more this season and stock prices will continue to march higher. (At least large caps, small caps have a few more hurdles to clear.)
In the week ahead, the market is in the lull ahead of the next earnings season. There is little on the economic calendar, but investor focus will be heavily on the Federal Reserve’s minutes from its last meeting, expected Wednesday. That was the meeting where the central bank raised interest rates for the first time since 2018, and investors will be watching for any clues from the Fed about when it might start to unwind its balance sheet, another form of policy tightening
Employees of Capital 19 presently own shares of the companies mentioned in this report.
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.