Course of Action
The stock market bounced back from its worst week of the year, finishing with its best day of the year on Friday. The rally seemed to be triggered by the comments from Atlanta Fed President Raphael Bostic Thursday afternoon, in which he suggested that the impact of Fed rate increases so far may only be getting started, a reason to be careful in deciding on further rate hikes lest the central bank overstep. “Slow and steady is going to be the appropriate course of action,” Bostic said in comments to reporters, with perhaps only two more quarter point increases needed before the Fed can pause.
Whereas one must be careful to not confuse correlation with causation, the market was down 1% for the week in lackluster trading prior to those comments and moved higher consistently the rest of the week with the S&P 500 gaining 1.9%, the Nasdaq Composite jumping 2.6%, and the Russell 2000 rising 2.0%. Advancing issues outnumbered declining issues by almost two to one. The yield on the 10-year Treasury inched up 1 basis point to 3.96%, with the dollar easing modestly, and gold and crude oil up 2% and 4% respectively.
The other positive news was economic data both from the U.S. and China. The U.S. data showed better than expected demand for services in February, new orders rising to the highest level in more than a year and hiring increasing. The China data showed early signs of the benefits from the relaxing of its zero Covid policies.
Inflation Fixation
The February jobs report on Friday will be in focus following the January headline number of 517K job additions. A deeper analysis suggests that the January report was heavily influenced by unusual seasonal adjustments from the warm weather and other factors, with the actual number of jobs decreasing during the month. The consensus estimate for February is that a more moderate 215K new jobs were added to the economy, with the unemployment rate expected to hold steady at 3.4% and a 0.3% month-to-month bump in average hourly earnings anticipated. The report could be a significant factor in the upcoming interest rate decision at the March 22nd FOMC meeting.
Regardless of the actual data, it is likely that the usual suspects will be front and center with unsettling commentary about an impending recession and/or higher interest rates. We remind investors that the media historically tilts negative. Additionally, bearishly biased Wall Street strategists can always argue that the downside just hasn’t happened yet while the market rises, and then when the market does decline, they can claim that they warned you. Clearly there are times for caution when stock prices seem elevated, and times for courage when prices are depressed. Our analysis suggests that present valuations seem reasonable, with earnings growth likely to resume later this year and interest rates finally having returned to historically normal levels. Importantly, we feel the fixation with fighting inflation is a misplaced emphasis. As a result, we feel the 5% yields on six-month and one-year treasury bills seem very attractive. We also continue to favor small and large value stocks and believe a position in gold is prudent given the unprecedented money supply expansion of the past few years, as well as the frequent shifts from risk-on to risk-off and vice versa as macroeconomic sentiment twists and turns.
Stocks on the Move
Two of North Star’s holdings were featured in Barron’s recently. The publication wrote up why western apparel may be popular, but Boot Barn Holdings Inc (BOOT) isn’t just a fad, as well as how to invest using billionaire David Einhorn’s playbook whose hedge fund Greenlight Capital has Green Brick Partners Inc (GRBK) in its top five largest holdings.
-13.7% Myers Industries Inc (MYE) is a manufacturer of sustainable plastic and metal products for industrial, agricultural, automotive, commercial, and consumer markets. The Company is also the largest distributor of tools equipment, and supplies for the tire, wheel, and under-vehicle service industry in the United States. Last week, Myers reported fourth quarter earnings of $0.32 per share and revenue of $212.8M. The results look solid across the board, but some investors may be concerned by 2023 guidance that implied soft organic growth and increased spending to implement the Myers operating system.
+14.6% Blue Bird Corporation (BLBD) designs and manufactures school buses and commercial buses for school districts, large national fleets, businesses, government agencies, and non-profit organizations. There was no significant company news last week.
+14.2% Westwood Holdings Group Inc (WHG) provides investment advisory services to a broad range of institutional clients. The Company also offers trust and custodial services to institutions and high-net-worth individuals. There was no significant company news last week.
+13.4% U.S. Silica Holdings Inc (SLCA) is a global performance materials company and leading producer of commercial silica used in the oil and gas industry and in a wide range of industrial applications. There was no significant company news last week.
+12.4% Delta Apparel Inc (DLA) designs, markets, and manufactures branded and private label active and headwear apparel. The Company’s products are sold to boutiques, department stores, outdoor and sporting goods retailers, college bookstores, screen printers, and the US military. There was no significant company news last week.
+10.9% The Mosaic Company (MOS) is one of the world’s leading producers and marketers of concentrated phosphate and potash fertilizers and feed ingredients for the global agriculture industry. There was no significant company news last week.
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.