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Kuby’s Commentary

Whacked Wacky

Feb 27, 2023

Damage from Data

“The Wacky U.S. Economy” is the most recent Barron’s magazine cover story. The article  suggests that there is no precedent for the current economic conditions, therefore traditional monetary policy and forecasting tools are ineffective. Specifically, the combination of the long tail of the massive stimulus, the supply-demand imbalances created by the pandemic, and the high-level of fixed rate debt (90% of mortgages have been fixed at very low rates), results in a resilient economy with record low unemployment, yet also very negative sentiment and stubbornly high inflation.

All the oddities were in motion in holiday-shortened trading last week starting Tuesday with relatively strong year-end earnings reports from Walmart (WMT) and Home Depot (HD), but which also reflected both companies’ concerns of a near-term slowdown. The real damage to the market came on Friday as the Federal Reserve’s preferred inflation gauge, the core PCE price index,  jumped 0.6% in January and 4.7% from a year ago, coming in above economist estimates. Meanwhile, the underlying strength in the economy was also apparent as consumer spending surged 1.8% last month, the biggest increase in nearly two years. Stocks were whacked during this wacky week, with the S&P 500 sliding 2.7% in its worst week since early December, the Nasdaq Composite losing 3.3%, the Russell 2000 dropping 2.9%, and declining issues outnumbered gainers 3-to-1 on the NYSE.

The bond market also struggled with the yield on the 10-year Treasury increasing 12 basis points to 3.95%, its highest level of 2023. The yield on the 2-year Treasury increased a similar amount to reach 4.78%, leaving the curve inverted at 83 basis points, continuing to suggest an impending recession, as has been the case since July 2022. Perhaps in this wacky economy the inverted yield curve does not have the same meaning as in past cycles?

One final note on the recent inflation data: whereas the recent CPI, PPI, and PCE readings came in hotter than we expected, the numerous other measures we track are still showing slight weakening of prices. As such, we continue to believe that by the summer or early fall of 2023 that inflation will have moderated to an acceptable level. In the meantime, we favor the 6-month T-bill with a yield of over 5%, gold, and selective small-caps for investment.

Winding Down

Earnings season comes its conclusion, with the last 5% of the S&P 500 reporting results for the fourth quarter. Composite earnings are on track to show a 4.8% year-over-year decline, with expectations for further declines in the first and second quarters.

The economic calendar is light with durable goods and housing data in focus. Given the apparent investor concerns regarding the persistence of inflation following the PCE report last Friday, the coming February employment report on Friday, March 3, will likely draw the most attention this week.

Stocks on the Move

-20.5% Interface Inc (TILE) is a global flooring solutions enterprise with an integrated portfolio of carpet tile and resilient flooring products, where everything is third-party certified carbon neutral. The product range include Interface® carpet tile and LVT, nora® by Interface rubber flooring, and FLOR® premium area rugs for commercial and residential spaces. Last week, Truist downgraded TILE to Hold from Buy and lowered its price target to $9 from $13 after revising its model to reflect a contracting market. The analyst’s new price target assumes a 6.5x EV/EBITDA multiple on FY23 earnings.

-11.8% ARC Document Solutions Inc (ARC) provides large format document reproduction and printing services, mainly to architectural, engineering, building operator, and construction firms. Last week, ARC released Q4 results of $0.06 per share and revenue of $68.8M. While revenue came in slightly lower than expected, the company’s strategic transition to focusing on the digital print market is proving to be successful.

-11.0% SP Plus Corporation (SP) provides vehicle parking solutions. The Company offers professional parking management, ground transportation, remote baggage check-in and handling, facility maintenance, security, event logistics, and other technology-driven mobility solutions. SP Plus serves the aviation, commercial, hospitality, healthcare, and government markets. SP announced fourth quarter earnings of $0.24 per share and revenue of $418.3M. During the quarter, margins were impacted by a number of investments that will continue for the next few periods while the company drives technology-related revenue growth.

-27.1% Sono Group N.V. (SEV) 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. Last week, Sono announced it was abandoning its initiative to manufacture the Sion vehicle, and instead it will solely focus on licensing its proprietary solar vehicle technology. Additionally, COO Thomas Hausch announced he would step down.

-12.7% The Container Store Group, Inc. (TCS) operates as a retailer of storage and organization products and solutions in the United States. The Company also designs, manufactures, and sells custom closet solutions via its Elfa and Closet Works segments. There was no significant company news last week.

The stocks mentioned above may be holdings in our mutual funds. For more information, please visit

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