Finally, We're Less Fed Up with the Fed: Jarvis® Update December 2, 2022

Is there light at the end of the Fed hike tunnel? We answer this and much 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 down in Miami, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. It's good to be here. Happy holidays to all the viewers.

Absolutely. Before we get started, a quick preview for everyone. First of all, markets did pick up this week. Got a couple of topics for you as we usually do. The first is investors less fed up with the Fed, and the second is plenty of opportunity, but not where it was before. So we'll jump right in after these announcements. We produce this show for you, the everyday investor, whether you have a 401(k) or an IRA, if you work with an advisor or if you don't, we'd love to be a resource for you. If you'd like a second opinion on how to position yourself for the upcoming market recovery, we'd love to talk. Give us a call on the number below. If you're an institutional investor, we've got something for you. That's our research service, Left Brain Investment Research. There we bring you 6 to 10 of our full-length stock reports per week, the same reports we use to make investment decisions for our clients, and also the chosen— that's our favorite stock and favorite bond opportunity each month. So if you're interested in that, take a look at the— if you're interested in that, follow the link below. Either way, we'd love to have you join our mailing list and receive our biweekly newsletter, the Jarvis Newsletter. That'll be out this week on Saturday morning. So definitely get on our mailing list and get that to your inbox. And finally, we'd love to ask you to like and share the video if you find it useful. We do want to have other investors find it. Let's not hide our light under a bushel basket here. And we'd also ask you to subscribe and hit the bell for notifications so you know when the next video comes out. And we're out every Friday with these videos. All right, let's jump right into the market recap. First of all, the S&P 500 was up 1.4% for the week. NASDAQ was the strong— was the highest flyer this week at 2.5%. And then the Russell 2000, the small-cap index, was also up 1.1%. Markets did move sharply higher on Wednesday after some positive news out of the Fed. Inflation is also starting to subside. We had the core PCE came out on Thursday. That's a number that the Fed does watch closely. Uh, that number was up just 0.2% month over month, so inflation does seem to be subsiding quite a bit. And also Treasury rates, uh, Nolan and I were talking before, 10-year Treasury rate dropped down to nearly 3.5%. That's as low as it's been since September of this year. And also the VIX, the volatility index, is moving sharply lower as well. Uh, we're down around 20, which does indicate somewhat of a normal market. Also had some additional earnings coming in, uh, mostly from the software sector. We're going to cover that in the second topic today. But no, with that all in mind, what are your initial impressions on the market this week?

Uh, good price action. It, uh, it made a lot of sense, as you mentioned. Let's start with the earnings first. This earnings season has been very sloppy. We've seen some headline huge misses and, and stocks not doing well because of it, but we've also seen some stocks we haven't seen in a while show up with some green behind their name, and we're starting to see some of those as well. We'll get to some names a little bit later. Also very interesting to hear how companies are dealing with this inflationary environment, with uncertainty as it relates to inflation and interest rates, staffing, earnings outlook. But I think the backdrop of what the Fed said this week— you mentioned, you know, the markets were really cooking yesterday. They really liked what the Federal Reserve Board had to say in regards to interest rates. And it's like you and I have been discussing on the last several tapings, we're at the beginning of the end of the inflation story and the interest rate increases. All the data that looks to be forthcoming, you're going to see the inflation numbers really start to slow down, which gives the Fed cover to ease off the gas as it relates to interest rates.

I agree with that, Nolan. We love to be at the beginning of the end rather than the end of the beginning. So very positive. So topic one is all things Fed. As we alluded to earlier, we had a major headline on Wednesday, and that was Federal Reserve Chair Jerome Powell signaling that we could have smaller rate hikes beginning even in December of this year. We had obviously considered or worried that there were going to be a lot more large rate hikes going forward. So he did assuage our concerns as far as that goes. Long-term interest rates, that's the 10-year Treasury, 30-year Treasury. They're as low as they've been since September when we did see a pretty big spike in interest rates. And we do see a decoupling or what we call an inversion in the yield curve, a decoupling between the short end of the curve, short-term interest rates and long-term interest rates. Nolan, with that as a backdrop, what are your views around the Federal Reserve? And can we answer the question in the affirmative? Is inflation starting to peak?

I'm gonna say yes, inflation is starting to peak, which means the rate of increases, as we know, are getting ready to slow down, but they're probably gonna stop altogether. And if you take a look at the yield curve, it's inverted. And for the viewers, that just means the short-term interest rates are higher than the long-term interest rates, which is a phenomenon that doesn't happen very much. And what it tells you is the interest rates that you see that are higher are not expected to last. That could have a positive impact on other investment prices as well as we head toward 2023.

How can we interpret lower long-term interest rates, Nolan?

Yeah, it's kind of goofy. You and I were talking in the pre-production meeting. If you bought a 10-year Treasury today, you'd collect 3.5% on your money for the next 10 years. Then you get your money back. But if you bought a 1-year T-bill, you'd be getting almost 5% on your money, especially after this next rate increase. What you can interpret is, you know, if you bought the 1-year and you got 5%, you get your money back in a year in 2024, and then you'd have to go do something else with it. And chances are when you reinvest it, it wouldn't be at the then close to 5%, it would be at something much lower. So the strip shows that these higher interest rates are only going to be here for a short time.

Okay. And then, you know, now that we're seeing the Fed is starting to pull up off the gas here in terms of rate hikes, do you think we can finally as investors get back to looking at the fundamental micro picture and a little bit less at the, at the macro picture?

Yes. And we've been there for the last couple of weeks and I think we're going to be in this environment going forward. I think everything that's happened, we can put in a rearview mirror. We can start rolling up our sleeves, listening in to transcripts and finding out what companies are handling this environment well. Who is gaining market share, competitive advantages in this environment, and whose business models are adapt enough to, to win in this current environment. 2023, from our eyes, looks very prosperous. We're in this period now where you'd expect a Santa Claus rally to happen, and we're starting to get that. Pretty soon people's attention are going to go from the rearview mirror that was, uh, 2022 to the windshield, which is 2023. And with earnings expectations coming down with corporate CEOs really watching the bottom line, I think earnings estimates has a good chance to come in much better than what Wall Street and investors anticipate. That's a recipe for higher prices as we get to 2023.

Thank you, Nolan. That's a great segue to our second topic. So we'll move on to topic 2. That's opportunities are abundant, but new leadership is beginning to emerge. First of all, software was once considered to be eating the world. Software companies and software stocks were really dominating everything for about a 5 or 10-year period there in the 2010s. Business is starting to struggle in a lot of these enterprise software names. Got earnings this week from a few of those that were really, as Nolan would say, a belly flop. We heard from Salesforce CRM, we heard from Snowflake, SNOW, and we also heard from CrowdStrike, CRWD. Those are all pretty poorly received. And there's one commonality between all three of those. They all carry very high valuations on their stocks. Tech had become synonymous with growth for years, as obviously software and other tech businesses sort of dominated the market. But here we're starting to reject the notion that tech's the only way to find growth. Nolan, in that, in that case, can you share with us where are some of the opportunities that you see in the current market generally for growth? After you answer that, maybe you can name one or two specific names that you think that are really interesting growth opportunities.

Yeah. So there's a, there's a few. I don't know that there's a common theme. You know, we like— you and I were talking in pre-production, and for any of the viewers or any clients we've been talking to, we can't scream loudly enough about healthcare. You know, all year we've liked energy. We've also liked insurance, and healthcare has been pretty consistent all year. Healthcare is the original growth business. Uh, we don't think of it that way, but it is, it's durable growth. It's not always sexy or flashy, but generally you're getting businesses that are consistently growing double digits to mid-teens. Valuations today aren't very demanding. And we know no matter what economic cycles we're in, healthcare is generally something that we're not gonna defer. So it has the makeup of something that could be attractive. You add to it, it trades at a multiple lower than the S&P 500. And you can get the twin engines that we look for when we look for really compelling stock ideas. And that is you get a valuation reset and you get earnings growth. And that's one sector that has it. But we're finding opportunities sprinkled all over the place. Healthcare is one, but there's other areas as well.

Okay, now let's drill down a little bit in healthcare. I'm gonna ask you if you could share with the viewers maybe a healthcare company that you like. In this case, we're not gonna let you choose Inmode. We know you like that one.

I'm going to start with, you know, we don't often talk about the pharma or the biotech companies here, but there's a couple that we like in pharma and biotech. One is Amgen, the big biotech company. The valuation's not demanding. You get a 3.3% dividend yield, really durable business model. There's a recovery name that we had exposure to off and on for a very long time, which is Gilead, which has a very attractive HIV franchise. They did very well. Sovaldi, The problem is their drug works so well, it actually cures patients. And so they have a shrinking total addressable market, but they have an oncology business now that's actually growing. So earnings came in at 8 or 10% growth and the stock is rerated. You get over 4% dividend there. And then finally, in healthcare, really what's driving the world now is not how much you can charge your patients for service, but everything's now going to this value-based care. So how well you care for your patients and how much money you save the health insurer or the government. And so that's really the new regime as it relates to healthcare. And there's a couple of ways to play that. We've had exposure to UnitedHealthcare, which is the larger health insurer, and they, they have this business in their Optum business, but it's a small part of a really big company. A more pure play on value-based healthcare is Evolent, Healthcare, EVH, came public a couple of years ago. It's a really strong business. They do have positive earnings growth already on top of strong revenue growth. So just a few highlights in healthcare.

I like those ideas, Nolan. I want to talk a little bit more generally now to the viewers out there who may have made a ton of money in software stocks, tech, or even crypto in the last few years.

Uh-oh.

How can they change their orientation? Because I know it's difficult from a psychological perspective. Okay, these companies you may you have liked made you money. Now they're trading at a much lower price. Maybe it's tempting to jump back in. Talk to those viewers about bull— how do the new bull markets usually emerge and what's the best way to approach things?

Yeah, I think the best way to approach them is with a whiteboard. Oftentimes we bring in what we own to the discussion and it colors our view. Best to assume we don't own anything, everything's available at today's price, and with our fresh cash, what do we pick first.

I absolutely agree. It's difficult to let go of some things that may have made us money in the past, but it's very important to look toward the— what the new leadership is. Healthcare is definitely a good example of that. And then I wanted to talk one more question for you, Nolan. Obviously, we just talked about interest rates are starting to drop. We've talked for months about how much we like corporate bonds, high-quality corporate bonds. They're trading at elevated levels for the last few months. What do investors need to do if they have cash on the sidelines as things start to move here? Is there urgency around getting money into markets, both stocks or bonds?

My thought is, yes, we've been buying, buying, buying. I know clients that have money at the bank in cash. They've probably been feeling vindicated all year as the markets sort of gyrated and not in a positive way. The banks still aren't paying much. Time to get off the fence. We've seen inflation come down, but it's still not zero. It's still high single digits. And so that money needs to start getting put to work. And it was okay to have more of a defensive posture as things were unsettled, but things are starting to be settled and settled rapidly. So, bond prices we do like. We've noticed that prices have actually started to inch up more than what we'd like. And we've gone from yields at north of 7% to, you know, now having to settle for somewhere in the 6s. If things keep going at this rate, they may be back at the 5s. So, yes, there is some urgency to sort of get moving. And I agree with you. I think stocks and bonds generally look attractive right now.

Well, we're going to speak to the viewer out there that may have cash on the sidelines and it's time to start looking at ways to put that money to work. Definitely give us a call here. We've got a plan for the upcoming market recovery, both in stocks and in bonds. If you're a growth investor or you're an income investor, we've got ideas for all that. So give us a call at the number below. We'd love to have a conversation with you, take a look at what you're doing.

And if you're a crypto investor, we have some ideas for you too. I'm sure you're selling crypto. If you're selling crypto and liquidating and you're looking for some, some other high-powered ideas that can power your portfolio, we're developing a bounce-back list of some of these names that, that have sold off a lot. Yes, they are volatile and they may not be appropriate for everyone, but if you're a crypto investor, you're used to volatility. Stocks generally are much, much safer. There's a lot of names on our list that, that we think over the next 2, 3 years can do very, very well.

There's always opportunity somewhere. Nolan, we want to thank the viewers for being with us. Nolan, thank you for being with us. Any last thoughts as we leave everyone for the weekend?

No, I just say, like to say happy holidays to, to everyone as you get ready to head out on vacation and make your plans for the end of the year. I know it's been a tough year for most investors to stomach, but good times are on the horizon. I think 2023 is shaping up to be a very prosperous year. So let's keep our fingers crossed.

Happy to leave it there, Nolan, and we'll see you again next week.