A Boring Week -- But Boring Can Be Good: Jarvis® Update April 14, 2023

As spring rolls in, the calendar comes back around to the earnings season. We tell you what we're watching and more on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. Great to be here.

Great to be with everyone on a spring Thursday here. We'd like to, like, ask everyone to like and share the video. We do appreciate those that do. It helps other investors find it. Hit the bell for notifications and subscribe. That way you find out next time we're out with each video and we're out every other week with these. So we're going to quickly give you a preview. Markets did continue slightly higher this week. We've had a number of weeks of positive activity in the markets. Two topics for us as usual as we discuss this week's market activity. The first is we're calling The Week Was Boring. But boring can be good. And then the second is an earnings preview for Q1 earnings, which are going to start next week. A few announcements before we start with our normal programming. First of all, we produce this show for you, the everyday investor, whether you have a 401(k) or an IRA. If you manage your own investments or you work with an advisor, we'd love to be a resource for you. If you'd like a second opinion on how you're positioned in this market going forward into '23, '24, and '25, Please let us know. Get in touch with us on the number below on the screen. Also, if you're an institutional investor, we've got something for you as well. That's our institutional research service, Left Brain Investment Research. We put out 6 to 8— we put out 6 to 8 full-length reports from our analyst team every month. And also The Chosen, that's our favorite stock and favorite bond opportunity each quarter. The new Chosen report will be out next week as well. Finally, we'd like anyone to join our mailing list. Whether you're institutional or an individual investor, and sign up for our monthly newsletter. That's the Jarvis Weekly, and we're going to be out with our next newsletter next week. So look for that in your inbox every Saturday morning. So let's start with a market recap. The S&P 500 was up 1% this week. The tech-heavy Nasdaq was up 0.7%, and this was great to see, Nolan. The Russell 2000, that's the small-cap index, was up almost 2.5% this week. Which bucks the trend that we've seen throughout the first quarter of this year. But the market did continue a nice uptrend this week. Treasury rates do continue to stabilize. The 10-year Treasury is now below 3.5%. We topped out around 4.25% late in 2022, and it's been coming down ever since. So that means if you bought bonds in the last 6 months, you're definitely above, above water on those. Also, we saw some pretty positive news from the inflation data that came out this week. We're gonna cover that in topic 1. Alan, what are your main takeaways this week on what we've seen in the market's action?

Uh, you mentioned that the markets were boring, and in this case, I think boring is good. We've had way too much excitement, uh, here over the last short run after the, the bank debacle and the inflation and interest rates and Fed meetings. So a little calm can do us all good. So I would say it's positive.

Absolutely agree. We'll jump right into that first topic then, Nolan. So we are calling topic 1 a boring week, but boring can be good. As Nolan said, we have had too much excitement early in 2023. We've had the banking issues, we've had inflation that's still kind of rearing its head. We've got interest rates. We've talked about the Fed ad nauseam. We're about tired of that. But markets did continue to grind higher this week. One indicator we look at is the VIX. The VIX index is actually below 20 this week, down below 18, and that's as low as it's been in some, some time. It's really good to see that. I think investors are getting a little bit more comfortable with the way markets are trading. CPI, that's the Consumer Price Index. That's a huge measure of inflation that a lot of economists and the Fed does watch, was up just 0.1% over the last month. So that means prices were up just a tenth of a percent. And for year-over-year reading, prices were up 5% versus last year, which is still pretty elevated, but it's pretty good compared to, you know, the 6, 7, 8, 9% readings we were seeing in previous months. And then even more exciting was the Producer Price Index, a measure of wholesale prices that was down half a percent over the last month. And then the reading for year-over-year was up 2.7%. So kind of more in line with what we normally see. This is the biggest drop we've seen since the pandemic. So a lot of really positive news in inflation. We've also seen markets beginning to thaw, especially in credit. High yield bonds are starting to be issued again, which is nice to see, a good indicator. And then finally, some lagging stocks this year, especially in healthcare, started to pick up this week. How do you interpret this week's boring action?

So again, I think the markets do need time to heal. We've digested a lot of trauma. And so I think the healing time is good. The one measure that you noted that I would highlight would be credit spreads. You know, here we're an income shop, so we do follow what's happening in the markets, not just the stock, stock markets, but the credit markets. Credit markets are a lot more sensitive, particularly bad news. And so it's a really good indicator or tell of what's happening beneath the surface. And you mentioned earlier all of the gauges and how they had changed. And whether it's VIX that we're looking at, whether it's small caps winning one week, losing the next, whether it's energy prices, whether it's CPI or Treasury rates, those things really have been swapping places for 18 months or so. And you're kind of pulling your hair out, or at least I have, trying to figure them out. But the one truth teller is credit spreads. That's a real truth serum. If the credit markets are working and operating well, then you pretty much have a healthy environment. And I just find it very interesting that all this talk of recession, how bad it's going to be, global economic turmoil, the banking issues— if you take a look at credit spreads, they really haven't budged. So credit investors, the largest market, is telling you whatever problems that there are, they're not going to be a return of something awful like 2008. And at this point, things look to be well contained. So again, we're looking for opportunities in this market and we're looking for recoveries and we're looking for places that have been damaged and they shouldn't have and places to go to, to do very well. So that's my reading of the way things are shaking out. I think it'll become more obvious to people as the months roll on. I think we get to the fall or the end of the year, you're going to look up and be surprised at the returns that were posted.

It's definitely good to hear, Nolan. We're happy to see some calm waters in the seas here. Definitely seeing a lot of opportunities, not only in, in stocks, but also, as you mentioned, in credit. With rates starting to come back down, the window for putting money to work, especially in the credit markets, in the, in the bond market, is certainly closing. So keep that in mind. With that, we'll move on to topic 2. So topic 2 is a preview of the first quarter earnings season. By the time viewers see this video, many of the world's biggest banks will have released earnings. They are releasing earnings on Friday this week. Over the next few weeks, we're going to hear from some of the largest tech companies in the world, as well as a number of many other important corporations. We've seen this pattern for the last year or more, Nolan, that stocks tend to do quite well after earnings, immediately after earnings, and they tend to fade after. First question for me, Nolan, is do you expect that trend we've identified to continue this quarter?

Well, you know about the second rule of thermodynamics. If I was a betting man, probably, you know, I think the setup is pretty good for a lot of these companies going into earnings season. One is just expectations are a lot lower. I think these companies' CEOs and CFOs have done a wonderful job the last couple of quarters of talking down expectations. So the bar is much lower for them to wow and impress investors. And so I expect a lot of that to happen. You know, we do have the energy sector. That's probably the one out of the 11 sectors in the S&P where you're looking over— you're looking at year-over-year declines just because oil prices are lower right now in the low 80s than they were last year at this reporting time. So that would be the one sector. We'll see what happens with financials. They are the wild card. I think investors will probably give them a pass. I think they're going to have to reserve more for losses and, and talk about their outflows, but I think the commentary there and the forward guidance is a more important. And, um, outside of those two areas, I think the traditional growth areas— I think tech area is going to do very well. You've had almost 8 straight quarters of lower earnings, lower revenues, and lower expectations. And so I think the bar for them is going to be much easier to cross. So I think it's going to be easier to impress there. And then finally, you mentioned small caps. I'm going to throw in mid-caps because mid-caps and small caps are both lagging this year. And, you know, from our bottoms-up work, there's a ton of names that we like in this, let's call it, $2 to $20 billion size range. So not big enough to move the S&P, but certainly big enough to make investors money. And this sector, the valuations there are more attractive than we've seen in a very long time. Really good business models. And in some cases, you've seen businesses that haven't slowed down of the last 2, 3 years, the valuations is just much cheaper. So those 3 areas I'm really paying attention to during this earnings season, and I wouldn't expect to see a lot of double-digit winners through earnings. So it'll be something to pay attention to.

Absolutely. And Nolan, of course, we like to remind folks we're fundamental investors and we're not only fundamental investors, but we like to talk about individual businesses. What are some of the more consequential earnings releases you're looking forward to over the next few weeks here?

Well, a couple of years ago they coined this acronym, the FAANG stocks— Facebook, Amazon, Netflix, and Google— and they all report coming up here in the next week or so. And so that'll be one area that we want to pay attention to. Of course, if you're looking at the S&P this year, it's been big outperformance in the S&P versus the Dow versus mid-caps versus small caps. And part of the reason is the S&P is a cap-weighted index. So the larger you are, the more weighting you have in the index. And I think I've seen the stats, something like if you take out the top 10 companies in the S&P 500 year to date, uh, the returns go from, you know, mid to high single digits to middling at best. And so it'll be interesting to see if the fundamentals of these big companies, these big growth and tech companies, really match the forward stock price movement we've seen so far year to date. So that'll be one of the areas that I'm really paying attention to.

We're always looking forward to earnings season here. It's the most important time of the year for us as fundamental investors. We get to take a, take a look at what's going on under the hood of these companies and more importantly, learn about the trajectory of what's going on in the future for those companies. So we're going to cut it off here. Nolan, it's been good being with you and being with the audience. Any final thoughts as we move into earnings here?

Yes. South Florida is on my mind. Been a lot of rain in South Florida, my hometown of Miami. We've getting floods. They closed the schools. So I'll send in good energy to our neighbors in South Florida that the flooding and the raining stops soon and that all is well and safe. Also spending— sending good energy to our Miami Heat that have a play-in game tomorrow night and sending them good energy that they'll look better tomorrow night than they did a couple of nights ago. So those are my closing thoughts.

We'll be back with you in 2 or 3 weeks. To talk about what we're seeing in the earnings season. Until then, we'll see you next time.