Stocks registered their best weekly percentage gains since November, as the economic data releases and the corporate earnings reports encouraged investors. On the economic front, the University of Michigan Consumer Sentiment Index climbed in January to its highest level in nine months, providing evidence that the American consumer could be more resilient than the Wall Street pessimistic strategists are forecasting. Most significantly, the Consumer Price Index (CPI) data released Thursday showed prices declined slightly, boosting hopes that the Federal Reserve may soon slow its pace of interest rate hikes. The monthly CPI increases for the last six months of 2022 only totaled 1.1%, following nearly a 6% increase in the first six months of the year. Earnings season kicked off with reports from Bank of America Corp (BAC), Citigroup Inc (C), JPMorgan Chase & Co (JPM), and Wells Fargo & Co (WFC) showing solid results despite a rise in expenses, increased provision losses, and cautious outlooks. Our analysis of the big banks results suggests that these firms are prudently assuming higher credit losses will emerge as loan payment data emerges. In fact, the higher loan loss recognition and reserving by BAC and JPM in their 4Q22 results suggests that their better-than-expected earnings may have been even better than reported; both firms’ ratio of Allowance For Losses as a Percentage of Nonperforming Loans rose significantly in the recently reported results. This is a key metric we track regarding the quality of bank earnings – the higher the ratio, the more conservative and high-quality the earnings reported.
Small-cap stocks were the biggest winners with the Russell 2000 surging 5.2% for the week, while the Nasdaq Composite jumped 4.8% and the S&P 500 added 2.6%. We think the small-cap rally could be in the early innings, as the sector still trades at below average multiples with numerous bargain opportunities that we have identified for our North Star Mutual Funds.
The recent trends of a lower dollar with higher gold and bond prices remained in place. The yield on the 10-year Treasury declined 6 basis points to 3.51%, its lowest level since September, while gold reached its highest level since April.
The financial markets were closed on Monday in observance of the Martin Luther King Jr. holiday. The calendar includes the Empire State Manufacturing Index release on Wednesday, followed by the producer price index (PPI) report and retail sales report on Friday. The expectation is for that economic data to show modest softening.
The week also includes a heavy slate of speeches from Federal Reserve members as the FOMC January 31-February 1 meeting approaches. The obsession with the Fed reached new heights this weekend as Barron’s had an in-depth article highlighting the entire roster of Fed officials that felt to us as if they were introducing the starting lineup in the Super Bowl (Jerome Powell at quarterback, in his backfield Lael Brainard and John Williams, at wide receiver James Bullard, etc.…).
Earnings season progresses with 26 S&P 500 companies reporting results including Goldman Sachs Group Inc (GS), Netflix Inc (NFLX), and Procter & Gamble Co (PG) . The S&P 500 is expected to report a year-over-year decline in earnings of -3.9% for the fourth quarter, which would mark the first year-over-year decline in earnings reported by the index since Q3 2020 (-5.7%).
Once again, our politicians in Washington are struggling to find compromises, resulting in the Treasury Department warning the U.S. will reach the debt limit on January 19 and will need extraordinary measures from Congress to avoid a default. If history repeats, a last-minute deal will be reached before the deadline, as no one amid the negotiations wants to be seen as caving before absolutely necessary. However, the repeated habit of deficit spending by Congress remains one of the key drivers of our ongoing view that some exposure to precious metals in investor portfolios is prudent.
Stocks on the Move
Stocks with news…
+25.0% Sono Group N.V. (SEV) manufactures and sells electric cars with integrated solar cells and panels. In addition, the Company monetizes its variable battery technology for integration in numerous types of vehicles, including buses, trucks, camper vans, trains, and boats, as it aims to reduce carbon emissions and provide clean and affordable transportation for the masses. SEV put out a press release on Wednesday saying that the Company has received €40M in payment commitments from its customer community campaign. This was a non-dilutive solution to providing funding for the company as the Sion vehicle enters pre-production.
+18.2% The Eastern Company (EML) manufactures and markets a variety of locks and other specialty industrial hardware. The Company primarily offers locks and latches for truck bodies, computers, office equipment, and various applications for the electrical, automotive, and construction industries. Last week, EML announced that Mark Hernandez would assume the role of CEO on January 23rd, replacing August Vlak who has held the position for 7 years.
+14.0% Amazon.com Inc (AMZN) is an online retailer that offers a wide range of products. The Company products include books, music, computers, electronics, and numerous others. Amazon is also the dominant cloud services provider (through Amazon Web Services, or AWS), an influential entertainment company through its video streaming operations, a force to be reckoned with in grocery with its ownership of Whole Foods, and a leader in digital personal assistant devices (Alexa and Echo). Last week, Morgan Stanley analyst Morgan Nowak gave AMZN a Buy rating but warned of increasing cost pressures related to AWS buildout.
+11.0% Advanced Micro Devices Inc (AMD) operates as a semiconductor company worldwide. Its products include microprocessors, chipsets, discrete and integrated GPUs, data center and professional GPUS, and development services. Last week, AMD announced the appointment of Jean Hu as CFO. Ms. Hu is the former CFO of Marvell Technology (MRVL).
Stocks with no news…
+21.9% Boot Barn Holdings Inc (BOOT)
+17.8% Superior Group of Companies Inc (SGC)
+16.4% Blue Bird Corporation (BLBD)
+14.9% ARC Document Solutions Inc (ARC)
+14.4% Accuray Inc (ARAY)
+13.9% Denny’s Corporation (DENN)
+13.8% Delta Apparel Inc (DLA)
+12.3% Weyco Group Inc (WEYS)
+12.2% The Container Store Group Inc (TCS)
+11.9% KKR & Co Inc (KKR)
+11.2% Flexsteel Industries Inc (FLXS)
+11.0% Rocky Brands Inc (RCKY)
+10.5% NAPCO Security Technologies Inc (NSSC)
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.
The information provided in this commentary is not an offer to sell or the solicitation of an offer to purchase any security, product, or brokerage service. The information is not intended to be used as the basis for investment decisions, nor should the information be construed as advice designed to meet the particular needs of any investor. This commentary is presented to illustrate examples of the securities that North Star Investment Management Corporation and/or its affiliates (“North Star”) may have bought for client accounts and the diversity of markets in which North Star Investments may invest, and may not be representative of current or future investments. You should not assume that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary will be profitable or will be equal to any corresponding performance levels that might be indicated. Past performance is no guarantee of future results. Investments in securities involve risks including the possible loss of the principal invested. North Star and others associated with it, including employees, may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary. North Star may buy, sell or hold these securities in proprietary or client accounts. North Star will not be providing regular updates or advising you of any changes in the views expressed herein. Investors should consider their investment objectives, risk tolerance, and financial situation and needs before investing in any security. Tax considerations, commissions, fees and other costs should be carefully evaluated with one’s investment and/or tax advisors. Information provided is obtained from sources deemed to be reliable, but North Star cannot guarantee the accuracy or completeness of the information. This material may not be reproduced, distributed or transmitted to any other person in whole or in part without the prior written consent of North Star. A copy of North Star Investment Management Corporation’s Form ADV Brochure, Privacy Notice and Business Continuity Plan summary can be obtained by calling 312-580-0900.