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Kuby’s Commentary

Cloudy with a Chance of Cloudy

Sep 7, 2021

Gloomy or Growth-y?

The stock market continues to chug along to new record highs despite the extraordinary challenges presented by the pandemic during the last 18 months, as well as the stiffening headwinds still to be confronted with new variants, a bloated national debt, and uncertainty over additional fiscal stimulus all brewing. Channeling the Grateful Dead, one might say “troubles ahead, troubles behind, U.S. economy you better watch your speed…”

There were mixed signals as to whether the recovery remained on track, with the employment report on Friday showing only 235,000 jobs were added in August versus expectations of 720,000. It marked the slowest job growth since January, leading Grant Thorton’s chief economist Diane Swonk to call it a “gut-wrenching number.” The data suggests that most of the softness came in the leisure and hospitality industries, which makes sense given concerns over the Delta variant, with consistently more than 150,000 new cases and over 1500 deaths in the U.S. daily. The leisure and hospitality industries had been driving much of the job growth with monthly gains at 350,000 for most of the spring and summer. Wage growth at 4.3% and upward revisions in the previous two months totaling 134,000 jobs provided a silver lining to the otherwise gloomy report. The elevated wage inflation reinforces our conviction in protecting our fixed income holdings by allocating a significant portion to VTIP (Vanguard Short-Term Inflation-Protected Securities ETF).

Any (obviously unwanted) acceleration in Covid cases or labor market uncertainty likely will enhance the Fed’s dovish sentiment, while any (obviously desirable) deceleration in Covid cases and labor market strength likely will embolden hawkish sentiment.  While we listen carefully for sentiment shifts, our security-by-security selection processes are what drive confidence that there are many meaningfully undervalued businesses regardless of short-term financial market swings.

Looking at various markets this past week, the Nasdaq performed the best, gaining 1.55%, as investors rotated back into the mega-cap tech companies. One guest on CNBC referred to Microsoft stock as his “bank account,” since it has a higher yield, implying it was equally safe as a deposit at a financial institution. We agree Microsoft is a great company, but history would suggest that at over 37 times earnings there is substantially more downside risk in holding those shares than the risk of a bank deposit. Small caps fared well, with the Russell 2000 gaining 0.65%, while the S&P 500 advanced 0.58%. The yield on the Ten-Year Treasury held steady at 1.32%, the dollar moved fractionally lower, and gold inched up to reach its highest level of the summer, possibly due to sentiment that the weak monthly labor report ultimately delays a less expansionary Fed.

Last Call for Fall

One area we’ll be monitoring is school re-openings and the associated possible chatter about Covid case trends.  So far, there are some early anecdotes that university campuses are seeing some early spikes.  For example, LaSalle University recently canceled all organized tours of its campus for prospective students.  Most public schools started classes last week or will start this coming week.  We’ll be listening.

The market was closed on Monday in observance of Labor Day, and with the absence of any catalysts trading will likely be quiet the rest of the week, and likely more so early in the trading week given religious observances on Tuesday and Wednesday.

The economic calendar is light, with updates on producer prices, wholesale inventories, and the weekly jobless scheduled for release.

Federally funded emergency unemployment programs that paid an estimated 7.5 million people $300 a week ended on Monday (ironically on Labor Day). It will probably take at least a month to see what impact the absence of that program will have on employment and the economy.

Stocks on the Move

We only had one double-digit mover last week.

-10.4% Movado Group Inc (MOV) designs, manufactures, retails, and distributes watches, as well as jewelry, tabletop, and accessory products. Its brands include Movado, Hugo Boss, Lacoste, Ferrari, Coach, Calvin Klein, and Tommy Hilfiger. Shares have appreciated nicely in 2021, and our research team had a call with management on Thursday. Business is currently healthy – particularly in the US geography  — and the watch company is working toward being less reliant on Chinese suppliers by moving its fashion watch brands over to Swiss-made, a shift that consumers will see most during the upcoming holiday season. Overall, Movado’s “wrist share” (market share) is small and the Company is experiencing good growth.

MOV is a 0.5% position in the North Star Micro Cap Fund.

New position established: Sharps Compliance Corp (SMED) operates as a provider of waste management services. The Company offers containment, transportation, treatment, and tracking of medical waste, and the disposal of unused medications as well as other used health care materials. This new position relates to North Star’s belief that there will be a substantial uptick in new vaccinations and booster shots, particularly at retail pharmacies such as the ones serviced by SMED.

SMED is a 0.3% position in the North Star Micro Cap Fund.

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.

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