Another Week of Positive Stock Action - Is the Bottom In?

Another week of positive market action. Is the bottom in? We answer that question more in this week's Jarvis Market Update. I'm your host, Brian Dress, Director of Research here at LeftBrain, joined again by our CEO, Nolan Langford.

Hi, Brian. It's a wonderful Thursday. Happy spring break to everybody. Hopefully your team's still in it in the March Madness. We're on to the Sweet 16.

This weekend, well, unfortunately, Nolan, my team was never in it, so on we go. Uh, so as always, we start with a couple of announcements. The first main announcement for us is we have the April 3rd Zoom event, The Fortune Makers: Income Securities, and we'll put the link in the description below. And so, uh, if you want to join us, you'll leave the meeting with 3 actionable investment ideas, and also we'll have a live Q&A. You can ask us any questions about investments, not just about income securities. So look for that. Also, the Jarvis newsletter, as always, will come out on Saturday morning to your inbox. Make sure you sign up for that. Anyone that's on our mailing list, at the end of this weekend, will receive our short watch list of short-term high-yield bonds. With that, we'll jump right in. Market recap. Again, another strong week. That's 2 in a row. S&P was strong, up around 3%. NASDAQ led the, led the market with a 4% return. We had a huge rally on Tuesday and the Russell 2000 was up just a fraction. That lagged the broader markets. Major volatility in oil markets continues yet again. Crude oil is up nearly $10 this week. So energy stocks had taken a little bit of a pullback last week. That reversed in spades this week. Thursday, we received some positive news, the lowest jobless claims number since 1969. So the economy is definitely looking strong. And the bond market's a big mover. The 10-year rate has moved from 1.71 at the beginning of March to about 2.34 today. So pretty large move there this month. So, Nolan, all that in mind, what are your general thoughts on this week?

Interesting trends that we've seen. The oil price reversing, that doesn't surprise us. We knew it was sort of— it's been manic and depressive this year, so it doesn't surprise me that we got a bounce back there. The, uh, the second week of growth stocks bouncing back. Now that is interesting. The other thing that stuck out, uh, in your opening remarks was the 10-year. You know, interest rates moving 60 basis points, 0.6%, in such short a time. Um, that is very, very interesting. Something that we should all pay attention to. You know, that 2% mark, for a long time that was that Mendoza line, and we've cracked through that through the upside, and it's having all sorts of ramifications. On other areas, bonds, different areas of the stock market we'll get to later. That catches my eye. And then the final thing from your opening remarks were small caps. This is the second week in a row where the markets, the S&P, the Q's, the NASDAQ, has really have been buoyant and they've had really good, good bounces. But the small caps have underperformed for quite some time. I think that's interesting.

With that, we'll move to topic 1. So topic 1, we ask, is the bottoming process underway? This is the second week in a row we've asked this question, and investors are really looking for the answer. Um, so we've been sort of in a bear market for growth, and we pinpointed the beginning of that around February 20, uh, 2021. That was sort of the high watermark for a lot of the, the stronger growth names. Um, we're going to link a Forbes article below here Um, did a little bit of research. The average bear market lasts around 289 days. We're a little bit past that now, around 13 months since that high water mark for growth stocks back in February. But, um, it might be time to consider, is that bear market coming to an end? Uh, Nolan pointed this out in our meeting this morning. The inflection point was last week, last Monday the 14th. These stocks, these growth stocks, have been strong ever since that Fed meeting started on Tuesday of last week. So I guess the question we'll ask, Nolan, I'll leave it up to you to take it wherever you want to. Are we seeing a bottoming in growth?

Yes, yes, yes.

All right, could you, uh, expand upon that for us?

So our thoughts are a couple. Uh, before we were getting this— we're getting a dual action, both negative. One is as interest rates rose, then it was almost reflexive and you got the growth stocks that sold off and it's sort of the discounting of it. But then there's this whole other group that the stock prices imploding can't be explained by just a ratcheting up in interest rate expectations. And that was these, what we are calling these temporarily broken growth stocks, where something fundamentally changed in the story. And so you got the double whammy on the downside. Consequently, you've got stocks that are down 60, 70% um, from their highs over the last 6 to 9 months. And within that pile of wreckage, certainly some bounce-back candidates, and we can't wait to share those with the listeners.

As Nolan just teased out there, we're going to be putting together a list of bounce-back candidates we'd be happy to share with you, but you're going to have to contact us to get that one. So definitely, um, you know, click the link below to contact us and set up a meeting, and we can discuss some of those stocks for you. We saw a lot better action in some of the more high-profile, prominent names in growth space. So Tesla, ticker TSLA, is one we're all pretty familiar with. NVIDIA, NVDA, this is another one of the stocks that was one of the darlings, not only before the pandemic but also through the pandemic. DocuSign, this was one of the pandemic stocks, DOCU, was hurt after the pandemic sort of came to a close. And another couple of names here, EPAM Systems, EPAM, that was hurt a lot by the Russia-Ukraine war. And then Splunk, SPLK. So these all did pretty well this week. Things seem to be settling down, Nolan. For instance, we saw a down open today. It was bought pretty heavily. We also see some risk-on metrics like crypto starting to show strength. So we'll ask for your comments on all that price action this week, Nolan.

It's all bullish, uh, and it's definitely been confirmed by the VIX, which deflated today another 8%, and you're looking at the VIX just above 20, which historically where it should be. So you can never say the coast is clear from here, but it certainly feels a lot better. It's a lot less risky time to put money to work. I think there's some money to be made here over the next 12 to 18 months.

That's really good news. We've, um, been kind of bathing in a sea of bad news for the last few months. So a little bit of new, new regime in the market is definitely positive. With that, we'll move on to topic 2. Topic 2, we're calling the Barbell Portfolio. So here at Left Brain, we've been looking at commodity stocks, energy and materials really for the beginning of this year, the first 3 months. And We've been rewarded pretty well with that. But we're also looking at, as Nolan mentioned earlier, the growth stocks are starting to improve. Oil, as we said, did take a pause last week, but strong again. So we feel, feeling pretty confident about oil. XLE, I'll put the chart up here. That's the ETF that tracks a lot of oil companies that was up around 5% this week. So the momentum resumed there. Continued strength in other materials. One I've been watching closely is steel. We'll put up the ETF chart for steel here. Steel index was up around 7% or 8% in the last 5 days. Just a couple of questions, Nolan. The first is, what is your view on energy and materials as an investment thesis going forward? And then also, can you kind of explain what we mean by barbell portfolio?

Yeah, I'll start with the latter first. A barbell portfolio is one where we're going on one end deep value, and in this case energy, uh, materials, ag, fertilizers. We're calling that our deep value set. Pipelines, we're calling our deep value sector. And that's one side of the barbell. The other side is high growth, high beta names, high growth stocks that have a lot of upside potential over the, over the next, you know, 12 to 18 months. And these are generally characterized by fast-growing businesses, revenues north to 20% Large addressable markets, a lot of organic growth. The criticism has not generally been because of the— about their business models, it's the valuation. Now it looks like the valuations are sort of settling in. You also have M&A that's coming into the space where you're seeing a lot of private money and other public companies make bids for these companies. So it sort of puts a floor on valuations. That's the other side of the, uh, barbell— high growth on one side, deep value on the other.

All right, and then tell us a little bit more about energy and materials as an investment case.

Yeah, so these markets, uh, they're more than a momentum play. One of the things that's interesting about oil, natural gas, pipelines, materials, and even the chemicals— you can go back and look at the valuations. The valuations are the same as they were 10 years ago. So what's different is the acceleration in their business. So they used to be slow growers, or in some case, like energy, you know, no growers were having negative growth. Now you're starting to see an acceleration. And because they've had that decade where there was no growth, really what they've done is cut supply and they're committed to keep supply low. So as you see the demand ramp up, you're going to see a huge ramp up in not only the earnings but free cash flow, which is ultimately what moves investments.

Yeah, we've been saying this for the last few months. There's two ways to win on energy and materials. A lot of these stocks trade at really low multiples. And we see positive earnings. And the prices of a stock is the function of its multiple and its earnings growth. And so we see positive possibility to win in both in energy and materials. So we really like those businesses at this time.

I want to make an offer too for the listeners. We do have our Income Securities event coming up. Brian will talk about that in a little bit. Um, but the other thing is we do have our list of favorites in materials and in oil gas, uh, EMP companies, refiners. Give a call to our office for, for the listeners, and we'll be happy to discuss some of those names with you.

With that, we'll move to topic 3. Uh, we haven't talked a ton about bonds over the last few months, but it is one of our competencies here at Left Brain. We choose individual bonds, something we think sets us apart. As I mentioned before, since the beginning of the month, we've seen rates moving higher quickly, and that's across all bonds. That's US Treasuries, that's munis, corporates, even emerging market bonds. In high yield, we've seen 11 straight weeks of outflows from high yield bond funds. So definitely some acceleration to the downside there. So I guess kind of the conclusion I'm drawing is, you know, the Fed is starting to tighten, but the market might be starting to tighten before the Fed. Tell us a little bit about what you're looking for in the bond space, specifically in high yield, and kind of what's the sandbox we're playing in lately.

Yeah, there's no safe place to hide in fixed income land. And it's very challenging if you're an income investor, if you're a retiree counting on your investment portfolio to kick you interest income. Rates have been low for forever. Now they're starting to adjust. The current bonds you have in your portfolio are depreciating. But the income really hasn't started to increase to your portfolio yet. So it's the worst of all worlds. I think this adjustment period still has some way to go. Uh, there's a lot of individual corporate bonds we follow, and of course we follow government bonds, international emerging market bonds. So we really have a— an activity. Um, in a lot of cases, bonds have been leading indicators of what we expect in the stock market, so it also tips us to a lot of activity as well. And there are not a lot of bonds that are interesting, even though rates are up. Again, I mentioned it's kind of been the worst of both worlds because the existing bonds we have on the books that we've purchased for clients that are generating income, they're still generating income. That hasn't changed. What has changed is, you know, at the beginning of the year, the prices were 100 cents on the dollar, and now they're 85 or 86 depending on how long the duration. Um, so that's somewhat frustrating. The other side of it, we'll be able to lock in yields, investor will, at a much higher rate. So right now, CCCs on average are yielding about 9%, actually. And BBs, which are the very highest level of high yield, very low default rates, the BB level, those are yielding 7% in some cases. So once rates stop falling, the good news is that investors will be able to lock in really juicy yields. And you'll be able to lock them in for a long time.

Thank you, Nolan. That is something we're going to be discussing again on our April 3rd Zoom event. The, the link in the description below, you'll want to click that and, and reserve your spot. Um, we're going to be talking about, you know, alternatives we're looking for in the income securities world. You know, income securities are vital to the balance of a portfolio, so we've looked for some new ways to do it. We're looking at short-term high-yield bonds. We're looking at dividend stocks. We're going to share with you a few of our ideas on that day. Definitely make sure you click on that below. And with that, we'll close it out. Thank you so much, Nolan. Thank you to everyone who joined us. Again, we'll ask you to like, share, and subscribe. Put a comment below the video. We'll be happy to engage with you, continue the conversation. And again, make sure you sign up for the Jarvis Weekly Newsletter so you can learn our thoughts each week in your inbox. Nolan, thank you so much.

Thank you, Brian. And, um, whoever your new team is in the Sweet 16, I'm wishing you luck. This will be an exciting weekend.