Investors continued getting what they want, as well as what they need, despite some storm clouds forming on the horizon.
Stocks rallied to close once again at record levels Friday, with the S&P 500 topping 4,100, as investors ignored concerns about inflation even while March core producer prices (PPI), which excludes the more short-term volatile food and energy components of the economy, increased by the most in more than nine years on an annualized basis. We still caution that a surge in consumer prices is likely in the not-too-distant future, as almost all of the company management teams that we have met with have indicated that they will be passing on those higher costs to their customers. Moreover, our internal, proprietary research processes also support our views on coming price inflation as mentioned in our weekly blog from March 1, 2021, where we highlighted that each of the PPI economic statistical series we track has shown an acceleration in costs of inputs at the production level; this typically foreshadows an acceleration in price levels for consumers.
The technology and industrial sectors drove the advance of 2.7% in the S&P, its third-straight weekly gain, and its best week since early February. The Nasdaq jumped 3.1%, while small-cap stocks fared worse, with the Russell 2000 declining 0.46%, and the energy sector suffered a 4.01% decline. Trading was light, with U.S. stock exchanges posting their lowest volume day of the year on Wednesday. The dollar weakened modestly, while gold inched higher. The yield on the Ten-Year Treasury was stable at 1.67%.
We believe the journey to a robust economic recovery remains on track, particularly if the distribution of the vaccines can outpace the spread of COVID-19 variants. The record number of new cases in India is of concern to the global economy, as is the limited availability of vaccines in many of the heavily populated less wealthy nations. In the U.S. new cases have increased 12% over the last few weeks, although deaths have continued to decline but still have averaged around 1,000 per day. Some states are experiencing much worse results than others; for example, Michigan is reporting a sevenfold increase in cases from late February.
On the economic data front, first-time claims for unemployment insurance totaled 744,000, well above the expectation for 694,000 from economists. Continuing claims provided some good news on the labor front, with the total dropping to its lowest level since March 21, 2020. Also of note was the March jobs report that was released on the previous Friday when the market was closed, which showed that nonfarm payrolls in March increased by a very strong 916,000 while the unemployment rate fell to 6%. In short, the employment picture has been steadily improving, although the unemployment rate of 6% is still much higher than the 3.5% pre-pandemic rate, and the apples-to-apples U-6 unemployment rate of more than 8% may provide the Fed with plenty of cover to maintain short-term interest rates well-below long-term averages.
In a personal reminder that “you can’t always get what you want”, my Big Ten heavy NCAA tournament brackets fared miserably. I hope the Illini, Hawkeyes, Buckeyes, and Wolverines enjoyed watching the Final Four from the comfort of their campus apartments. As a side note, my wife’s bracket, essentially the opposite of mine, finished a respectable 6th out of 82, including picking Baylor as the champion. Her faith in her alma mater, Illinois, sank her chances of winning it all. Nevertheless, the tournament was enjoyable, and the stock market has been terrific, so it could be said that “you get what you need”.
Earnings season begins with 23 S&P 500 companies, including most of the largest banks, on deck to report results. The bar is set pretty high, as the S&P 500 is expected to report (year-over-year) earnings growth of 24.5% for the first quarter.
The Bureau of Labor Statistics reports the consumer price index for March on Tuesday. Expectations are for a 0.4% monthly increase; any surprise to the upside could upset the Fed’s easy money apple cart.
The University of Michigan Consumer Sentiment Index for April will be released on Friday. Expectations are for a reading of 88, which would be the highest level since the onset of the pandemic. We believe the gauge of future expectations within this reading is a particularly good indicator of the near-term health of the economy.
Stocks on the Move:
Those with news…
-11.7% Apogee Enterprises Inc (APOG) designs and develops value-added glass products. The Company offers glass and aluminum windows, storefront and curtainwall systems, and glass for framed art and pictures. Customers include architects, general contractors, glazing subcontractors, and building owners. Last week, the Company announced its FY2020 and Q4-2020 results. Fourth quarter revenue declined 8.0% to $309.0M with continued end-market headwinds. Headwinds mainly occurred within the Architectural Framing Systems segment which experienced lower volume for short lead time projects and other market-related project delays. As a result, Q4-2020 experienced a loss of ($1.65) per share which includes $70.0M of non-cash impairment charges and $5.0M in restructuring charges. During the fiscal year, the company paid down over $50.0M in debt and year-end cash equivalents increased to $47.3M. FY2022 guidance however, decreased to a range of $2.10-$2.35 per diluted share; previous estimates ranged $2.45-$2.94 per share.
APOG is a 0.9% holding in the North Star Micro Cap Fund and a 1.2% position in the North Star Dividend Fund.
-12.3% Evolution Petroleum Corporation (EPM) explores for and produces oil and gas. The Company focuses on acquiring established oil and gas fields and applying specialized technology to increase production rates. Last week, the Company announced a planned Spring redetermination of its senior secured credit facility resulting in a borrowing base increase from $23.0M to $30.0M. The increase is unrelated to the recently announced acquisition (04/01/2021) from TG Barnett Resources, LP., a wholly owned subsidiary of Tokyo Gas Americas, Ltd. The next redetermination will occur in Fall 2021.
EPM is a 0.8% position in the North Star Micro Cap Fund and a 2.0% position in the North star Dividend Fund.
+11.2% Boot Barn Holdings Inc (BOOT) sells western and work gear for individuals and families. The Company sells boots, jeans, shirts, hats, belts, jewelry, and other accessories. Last week, Loomis Sayles Small Cap Growth Fund established a $15.7M position with 260,227 shares.
BOOT is a 4.6% position in the North Star Micro Cap Fund.
+23.4% Build-A-Bear Workshop Inc (BBW) is an interactive and entertainment mall-based retailer that invites guests of all ages to create their own customized stuffed animals with clothing, shoes, and accessories through a bear-making process. Last week, Build-A-Bear launched its highly anticipated Animal Crossing: New Horizons collection. The plush toys, featuring villagers like Tom Nook and Isabelle, are available now online and in-stores this upcoming summer.
BBW is a 1.4% position in the North Star Micro Cap Fund.
Those without news…
+12.1% Flexsteel Industries Inc (FLXS) manufactures and sells wooden and upholstered furniture for the retail, contract, and recreational vehicle (RV) furniture markets. The Company’s products are sold to furniture dealers, department stores, and RV manufacturers. There was no significant company news last week.
FLXS is a 2.8% position in the North Star Dividend Fund.
+12.6% Value Line Inc (VALU) produces investment related periodical publications. The Company also provides investment advisory services to mutual funds, institutions, and individual clients. All total, Value Line collects data and provides analysis on around 7,000 stocks, 18,000 mutual fund and 200,000 options. There was no significant company news last week.
VALU is a 0.7% position in the North Star Dividend Fund.
+11.0% 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.
WHG is a 0.6% position in the North Star Micro Cap Fund.