Chicago: 312-580-0900 | Suburban: 847-831-8831 | Family Office: 312-338-7788 | Financial Planning: 312-440-5028 | Benefits: 847-831-8831

Kuby’s Commentary

Dark Days Drive Markets

Oct 16, 2023


Depressed Levels

The market action was primarily driven by the horrific events in the Israel-Hamas war, with a mixed performance from stocks while investors sought safe-haven assets such as U.S. Treasury bonds and gold. Defense and Energy sector shares rallied, with militaries engaging and oil prices surging. Consumer stocks were the bottom performers, and the University of Michigan preliminary consumer sentiment survey registered a sharp drop in October. Despite full employment and extremely healthy household balance sheets, consumer sentiment has remained at depressed levels lower than during the onset of the pandemic, and in line with the readings during the 2008 financial crisis. Stocks and bonds benefited from remarks made Friday by FOMC voting member Patrick Harker, President of the Federal Reserve Bank of Philadelphia, who said he does not expect interest rates to be raised further. We certainly agree and believe that rate cuts are on deck in 2024. Bank stocks fared well after the Q3 earnings season was kicked off by reports from JPMorgan, Citigroup, and Wells Fargo. JPM announced another quarter of record net interest income amid elevated interest rates and increased its full-year net interest income guidance, albeit accompanied by increased rates of consumer loan delinquencies in credit cards and auto loans.

Treasury yields were lower, with the 10-year yield down 15 basis points to 4.62%. The 2-year yield held steadier at around 5.05%. The S&P 500 added 0.4%, but the tech-focused Nasdaq fell 0.2%, and the small-cap Russell 2000 shed 1.5%. The Russell 2000 Value ETF (IWN) is now trading with an average forecasted P/E of under 10, with 5-year forecasted annual earnings growth of 15%. We think patient investors could be handsomely rewarded by investing in that asset class, which is an area of long-term focus at North Star. These low valuations seem extreme, and some sectors have uncommonly negative sentiment suggesting opportunity. In health care, for example, a mania regarding Ozempic, and similar weight loss drugs is driving extremely negative sentiment toward many other subsectors, such as hospitals, dialysis providers, and other treatment businesses. It seems unlikely that weight loss drugs are going to eliminate the secular trends that continue to increase healthcare spending as a percentage of world GDP.

Look Through the Fog

Whereas war headlines will dominate the narrative, it is also a busy week of economic data and earnings releases. The economic data, including retail sales, industrial production, and housing starts for September, are all anticipated to show incremental month-over-month gains. Of particular interest will be the speech by Federal Reserve Chairman Jerome Powell on October 19 as the blackout period for Fed speakers ahead of the Halloween FOMC meeting rapidly approaches. Let’s hope the Chairman has some treats for us, rather than additional tricks.

The Q3 earnings season also kicks into high gear next week, with 55 S&P 500 companies reporting results. Following last week’s positive earnings surprises, the index is now on track to post 0.4% growth in the quarter, snapping three straight quarterly declines. The Bull case for stocks in 2024 is the combination of a resumption of earnings growth and less restrictive monetary policy.

We will be working on developing a Bull case on the Chicago sports scene for a future commentary.

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.

Sign up to receive a weekly email with Kuby’s Commentary.

    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

    Recent Kuby’s Commentaries
    Kuby’s Commentary & Quarterly Update Archives