Confusion Reigns: Another Volatile Week

Confusion continues to reign on Wall Street. We try to make sense of some of the madness here on this week's Jarvis Update. As always, I'm your host Brian Dresk, joined by our CEO and Chief Investment Officer Nolan Langford. Nolan, welcome to the program.

Hey, uh, glad to be here, Brian, on this, uh, Masters Thursday. Me, like everybody, excited to see Tiger and how he'll finish and if he'll make the cut.

Yeah, we hope we'll be able to watch him on the weekend. Let's just jump right into our announcements. The first, as always, we've got the Jarvis newsletter. Comes out weekly on Saturday mornings, so make sure you click the link below and get on the mailing list so you get that in your inbox on Saturdays. And then the second thing is we've got our subscription service. We put out 8 to 10 full-length reports from our analyst team every, every month. We're also working on the chosen for this month, which is our best bond and our best stock opportunity. And premium subscribers get access to our model portfolios, our predictable model, our long-term growth model, and our model income portfolio. So, um, definitely check those out. And we're going to add a quick discount for those of you who want to take, take advantage in the next week. Put in the code VOLATILITY99, and for the next week you can get, uh, the basic subscription for $99 a month. So, uh, with that all being said, we'll jump into the market recap. Um, this week we had the indexes were, uh, all down. S&P was just down a fraction of a percent, NASDAQ down more than 2%, and the Russell was down more than 3%. So that's another week where the small caps lagged. Uh, everything was up, I think, Monday, Tuesday, and then mid-Tuesday, and then on for the rest of the week, a lot of selling. And then on Thursday session, a nice recovery in the afternoon, but volatility continues to be part of our lives as investors. Oil was down another $5 a barrel. I think that's positive for consumers and everyone in the economy, but we'll have to see how that all plays out. But definitely seems like, you know, the air is starting to come a little bit out of the inflation balloon, but a little too early to call the end. And then, of course, the 10-year yield, that was, you know, bonds and rates were really a big story this week. 10-year yield was up around 30 basis points this week, and the 10-year is at 2.65%, which is as high as I can remember it in the last few years. So things are definitely moving on the rates side of things with— we had a lot of Fed speak. A number of Fed governors spoke and spooked the markets. And it was really the kind of the catalyst for what we saw In any case, Nolan, what are your general thoughts as we get started here on the market?

I'd much rather talk about Tiger in the Masters. No, I agree. Confusion Reigns is an apt title. And we've seen this. It seems like for weeks we've been talking about this market where, you know, you certainly— it seems like you start to get certainty in one area And then the air comes out of that balloon, and then it looks like something else may be catching fire, and then there's a pothole over there. You know, you could say, may the market being choppy, you get the sense that hopefully we're starting to get some direction, or eventually we will start to get some direction. Right now there is none, and I think there's just a lot of uncertainty that's being reflected in prices, not only stock prices but bond prices. And what strikes me is it seems like interest rates have been almost a straight line up. Um, so that, that, that's kind of surprising. So those are my general thoughts. And the other general thought I have is just about earnings. Earnings, please save us. Uh, we're headed right into earnings week. Uh, we have a few this week, uh, not very many, but on Friday, tomorrow, I think we get a release of a few. Next week we get more, and then the following week we get a whole avalanche of earnings. Um, as our listeners know, that's our favorite time of the year. So those are my general thoughts.

Yeah, we love the earnings season because stocks start to trade on, uh, real fundamentals and not a bunch of innuendo and, uh, rumors. So definitely looking forward to that. We'll jump right into topic 1. So topic 1, confusion reigns. The last couple of weeks before this week saw some, uh, nice signs in the market, but that's definitely Taken a, taken a back seat. We'll start with what's, what's not working. There are a few sectors that are clearly not working. Rates have something to do with it, but there are other factors. The first one, we'll put up the chart of XHB. That's a housing homebuilders ETF. That's been one of the worst performing ETFs the last few weeks. Another area, semiconductors, that's the SMH. Put that chart up as well. Very troubled the last couple of weeks. Crypto had a tough week. Bonds obviously have been on the slide with rates on the way up. I wanted to point out this. I think people are starting to look anywhere for answers. We're in this whack-a-mole market that we mentioned a number of, a number of months ago, and we saw huge stakes taken in Twitter by Elon Musk and HPQ by Warren Buffett respectively. And saw large moves to the upside in both of those stocks after those were both announced. So I think people are looking for answers. Uh, is there anything we can lean on, Nolan?

You're right, the ground seems to be shifting beneath our feet. I think a lot of it, um, just falls squarely on the, uh, the shoulders of interest rates and bond prices. You know, one of the things we can always lean on is, uh, government bonds, because everything's priced off government bonds. But the fact that they've been so unsteady and unstable, I think it's been unsettling for a lot of investors because that's the core of what you base your portfolio on. And, uh, the fact that they not only have not performed but they seem to be sinking in quicksand, I think is upsetting and, and sort of disturbing. I think the other thing, and you and I talked about this earlier, is this inflation thing. I think a lot of investors are trying to determine Is it real? Is it ephemeral? How long is it going to be with us? Starting to hear this talk about peak margins and peak earnings for corporate businesses. And we've been saying really for years that, you know, hey, the market isn't very expensive if you take a look at how low rates are. But when you adjust rates for a new normal environment, what is the new natural level of stocks that investors should pay for earnings? And I think that's still an open question. Some of the traditional signs that we look at for strong market activity are starting to fade. So you mentioned small caps being much weaker. That's not a, a real good sign for, for us bulls. The other one is transports. Transports tends to be a leading indicator. If you look at rails, airlines, um, you know, FedEx, UPS, those are leading indicators. And so the fact they've rolled over, and at least is somewhat troublesome. But as we've seen, things change quickly. They tend to be able to change on a dime. And, uh, who knows, maybe earnings is the key, the match that makes everything explode. We'll see.

Nolan, I had to dig through my mental dictionary to figure out what ephemeral meant, but, uh, I think, um, yeah, I agree. I think earnings is obviously going to be a big, a big factor in things. And, um, I feel a little bit like I did about 3 months ago, which was everything was sort of going the wrong direction and we got into earnings and we got a little more clarity. With that, we'll go on to topic 2. So topic 2, since this is a family show, we're going to call it what the heck is going on with the consumer. XLY, which is the consumer discretionary ETF, was down another 2+ percent this week. Nolan and I were talking, a number of these stocks are trading at multiples under 10 times earnings, which I think is pretty low. Even considering a lot of the factors that are going on out there. Oil again is pulling back. We've seen that for the last 2 or 3 weeks, but obviously rates are rising. So that makes mortgages, mortgage rates higher, makes it harder for companies to borrow. Generally, the idea with rising rates is to slow down the economy a touch. But on the other hand, we know we're coming out of the pandemic. People are eager to travel. You go to the mall, there's people everywhere at the mall, people are shopping. But on the other hand, the mood seems terrible. Consumer confidence is quite low. Investor confidence is quite low. So Nolan, just a simple 2-word question, what gives?

Yeah, it's a simple question without a simple straightforward answer. Something will give, and as we've spoken about, the consumer is a really, really important tail and it's important to watch. 70% of our GDP is tied to the consumer. So, you know, I think the White House is right to be concerned, to try to do anything that they can to get the gas prices down, because they're certainly not doing anything to keep mortgage prices down. Those are continuing to go from the lower left to the upper right. And it looks like the market's telling us that the consumer is gonna be squeezed. Even though people are back to work, the unemployment rate is still really, really low. People still have to be in a pretty good mood to be able to want to spend. And outside of travel, which I think, you know, most people have been cooped up for a couple of years, are just excited to get back to life, I think that's certainly going to be sticky. But outside of the consumer traveling and spending money on experiences, I don't know how much else you could certainly bank on. At least that's not what the market thinks. And we've been really surprised here at the just the overall widespread weakness in the consumer sector that flows through the stocks, whether it's the mall, restaurants, certainly the furnishings area has really been struggling. You mentioned home builders, but anything that really touches the home has been, has been struggling. And, and so that's somewhat surprising. It'll be interesting to see where it shakes out. You know, the market's pricing a lot of these stocks as if We're in a recession or we're headed to one. And if you look at the prices, they will tell you that. And you talked about valuations, they're depressed, but the companies themselves continue to report really, really good earnings. So it'll be interesting to see how it shakes out.

And I would be remiss if I didn't mention a couple of the bright spots in the consumer. I'm definitely seeing some strength in Costco, COST. Walmart was strong this week, WMT. Uh, Nolan's favorite, the dollar stores, they've been good. So there's some strength there. I don't know if it's just kind of shifting, uh, deck chairs on the Titanic or what it is, but I still think there's upside to the consumer, but obviously the market doesn't tend to agree. So another event we're going to keep our eyes on in the next few weeks. Definitely looking forward to earnings of these companies to see what's actually happening. So topic 3 is cash is king. So in terms of what is working this week, our best performing ETFs are IYH, that's a healthcare ETF, but along the same lines, PGP, a pharma ETF, We got IYK in the top 10 list. That's a staples, consumer staples. And then XLU utilities. Kind of depressing to see these are the ones leading the market, Nolan. Commonality that I'm taking away are these are cash-generating businesses. Is that how you see it or is there something else here? What's going on?

I think these are cash alternatives. I think holding cash, most people know if inflation's 5%, then it's a melting ice cube, so to speak. If you have cash, you can buy less, and it's a certainty. Government bonds, we've seen that those are down double digits this year. It's really not a place, and it looks like maybe investors are looking for some place to hide. And all, all of those sectors that you mentioned are defensive in nature, so I'm not so sure it's investors saying, hey, these are areas that we like, uh, I don't know if they're saying anything about profit margins or durability as a business. It could be just, hey, we need someplace to park money. And, um, you know, it's the less bad house in a bad neighborhood. We'll see what happens either way. The fact that those sectors are leading is not necessarily a bullish indicator. You put that with the fact that small caps are lagging, emerging markets continue to lag. You know, what we look at for bullish activity, you we're looking at the biotech sector. Take a look at what the IPO sector is doing. Take a look at emerging markets. Uh, take a look at, um, technology. Take a look at IGV and take a look at IWO, which is the small-cap growth index. Those are more traditional indicators for how investors are feeling. And, you know, listening to our broadcast and us talking about the current market activity, it just strikes me if What we're looking at is going to be sustained, meaning that interest rates continue to go up, inflation continues to be an issue, and growth continues to just sort of plateau. It just strikes me that where you want to be is really the best businesses, the businesses that in spite of all of this can still, you know, grow their revenue double digits, still grow their earnings double digits, still generate attractive free cash flow, and still have competitive dynamics that work. In the end, you're still going to see the best businesses shine. We're just waiting for a point where the market starts to sort of normalize and stop acting like a manic depressive.

That makes a lot of sense. And, um, you know, some of the stronger stocks on our board, you know, Pfizer, AbbVie, Amgen, a lot of these are cash-generating businesses. I think the theme of 2022 has been so far, you know, the best cash flow generating machines. Are the favored businesses out there. The mood is just so awful out there. It's just amazing how price can change sentiment. But, uh, you know, that's just the world we're kind of living in so far in 2022, waiting for a catalyst to change the dynamic. So again, thank you, Nolan, for being with us. Thanks to our audience for, uh, taking the time to join us this week. Reminding you again, if you want to take advantage of our offer for our subscription service, $99 a month Enter the coupon code VOLATILITY99 at checkout. And, uh, Nolan, any final thoughts?

Yeah, I was thinking, how do we come up with that coupon code? It should have been Masters 99 or something, or Tiger Power or something. I was thinking—

hey, we'll see you again next week.