The stock market got a pre-Halloween sugar rush, with the S&P 500 3.9% higher, the Nasdaq showing a 2.2% gain, and the Russell 2000 jumping 6.0%.
The rally from the previous Friday continued through Tuesday, but disappointing results from Alphabet and Microsoft dragged down stocks on Wednesday. The week ended with strong momentum on Friday, as the core personal consumption expenditures price index, considered a preferred inflation gauge by the Federal Reserve, matched expectations with a 0.5% rise from the previous month and 5.1% from a year ago. Many traders have been betting heavily that the inflation numbers would exceed expectations. At North Star, we have taken the opposite position, believing future months will show inflation moderating, and expect 2023 to be a year of slow economic growth with more normal inflation numbers. However, adverse developments in Europe or with the pandemic could create further inflationary disruptions.
Earnings reports were a mixed bag, with some tricks and some treats. Outside of the high-profile disappointments, overall, the blended growth rate for profits did increase to 2.2% from 1.3%, on revenue growth of 9.3% up from 8.5%. The Energy sector provided most of the treats during the week and is also the largest contributor to earnings growth for the quarter. Future guidance remained within the historical normal range, with slightly more downward than upward revisions.
The yield on the 10-year Treasury dropped 20 basis points to 4.01%, reflecting the softening economic data, while the 10-2 spread widened 11 basis points to a negative 0.39%. The inverted yield curve remains a sign that the market anticipates a recession.
On the Chicago sports scene, Bears fans had 6 days to fantasize about a resurgence following a terrific performance on Monday Night Football. That illusion was shattered on Sunday in Dallas.
Earnings season peaks, with about a third of the S&P 500 companies releasing third quarter results. Those results might be overshadowed by the Federal Reserve meeting and Jerome Powell press conference on Wednesday. The language is expected to remain hawkish, and it is widely anticipated that the target Fed funds rate will be boosted 75 points.
Economic reports due include updates on construction spending, PMI, and factory orders, all of which are likely to confirm an economic slowdown. Of particular interest will be the September Job Openings and Labor Turnover Survey (JOLTS) on Tuesday and the October jobs report on Friday, as any unexpected weakness in the labor market could force the Fed to reconsider its hawkish jawboning and the wisdom of future interest rate hikes.
Stocks on the Move
18 stocks were up double digits last week. The following had significant news:
+16.9% was Flexsteel Industries Inc (FLXS). Last week, FLXS reported fiscal first quarter earnings of $0.09 per share which beat by $0.34 per share and revenue of $95.7M, which was down 30.5% y/y but beat estimates by $13.36M. The Company also experienced about 100 bps of gross margin erosion. In the earnings conference call, the Company reiterated its commitment to paying down debt and seemed optimistic that retailer inventories would normalize in the first half of CY23.
+12.5% Ethan Allen Interiors Inc (ETD) reported fiscal fourth quarter earnings of $1.11 which beat by $0.32 and revenue of $214.5M which was up 17.7% y/y and beat by $8.1M. Consolidated gross margin increased which the company attributed to its vertically integrated supply chain.
+11.3% Denny’s Corp (DENN) was a sector gainer after McDonald’s Corp (MCD) posted strong earnings which revealed an interesting consumer trend of “trading down” from full-service dining to fast food options.
+11.7% McGrath RentCorp (MGRC) reported third quarter EPS of $1.25 which beat by $0.08 and revenue of $200.5M which beat by almost $13M. The Company also raised its financial outlook significantly from a prior revenue guidance of $695M-$720M to a new outlook of $720M to $735M for the FY22.
+12.1% United States Lime and Minerals (USLM) also reported strong earnings with third quarter EPS of $2.77 and revenue of $66.46M up 27% y/y. USLM has made a few announcements in recent weeks of new business and we anticipate that trend to continue with the pattern of extreme weather events on the eastern US coast.
+21.4% Turtle Beach Corp (HEAR) spiked last week on news of a new board appointment that may potentially violate its agreement with activist shareholder, Donerail, insinuating the investor may seek further ownership or even bid once again to take over the company.
3 stocks were down last week. Amazon Inc (AMZN) which sunk 13.3%, had in-line earnings with net sales of $127.1B and third quarter earnings per share of $0.28. However, operating income decreased to $2.5B from $4.9B. What sent the stock plunging was conservative fourth quarter revenue guidance with a range between $140B-$148B, well below consensus estimates of $155B.
QEP Co. (QEPC) lost 14.0% but is notably illiquid.
Sono Motors (SEV) was down 11.5%. While the Company has challenging capital needs, North Star believes its solar car technology is extraordinary and could possibly change the world. We would be happy to discuss further with interested readers. Research analyst Brooke Kuby met with the Sono management team last week in Los Angeles, as well as experienced the Series III Sion car in person.
Movers with no news…
- +15.2% WEYS
- +13.2% MYE
- +12.4% CODI
- +11.0% ODC
- +10.8% GWRS
- +10.5% IIPR
- +21.0% BLBD
- +19.7% FLWS
- +14.8% SGC
- +14.5% BBW
- +14.4% GRBK
- +12.5% DLTH
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.