Is the Bottom Near? Jarvis Update May 27, 2022

Is the tide in the financial markets turning? We answer that question more in 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.

Glad to be here.

Well, it's good to be here on better circumstances this week, Nolan. Uh, just a quick preview for everyone, the 3 topics we're going to cover. The first topic we're going to cover is retail and the earnings that we got from retail. Second topic we'll cover is tech and a little bit of bottoming we're seeing in tech. And the third is the high-yield bond market. So we'll jump right in, but before, we've got the announcements. Uh, our first announcement, we've got one new report on our subscription service this week. It's about an independent TV broadcaster, so check that out. And we're also running a Memorial Day sale, uh, for the service. The promo code is RETURN99. I'll put that at the bottom of the screen here. That'll get you, uh, our basic subscription, $99 a month for the life of the subscription. So it doesn't go back to the regular price. So check that out. And then finally, we've got the Left Brain Thinking podcast. I just did a new, uh, conversation with Vince Carter of the CFO at Home podcast. Really interesting conversation about financial pitfalls in relationships, so check that out as well. That'll all be in the description below. So we'll get right into the market recap. First of all, the S&P was up about 3.8% this week, so, uh, we broke the 7-week losing streak. So very exciting there. NASDAQ up around 2.7%, and then the Russell, that's the small cap index, was up around 3.75%. So, uh, 3 3 winners, 3 out of 3, very exciting. We had a lot go on this week as we have in the last few weeks, a lot of earnings coming out from retail and tech, which we will cover here, and also some developments in the bond market. So we'll get to that at the bottom of the show. So, Nolan, before we get started with our 3 topics, what are your general thoughts on what we've seen this week?

After so many weeks of just selling and, you know, the downdraft even through earnings. It's nice to see the sun come out a little bit and to know that the markets can go up. So it's a nice reprieve, much better price action this week. And in general, let's hope we're on the path to better returns going forward.

Yeah, I got the fingers and toes crossed, Nolan. So we'll, uh, hope it keeps going next week. So we'll jump right into topic 1. So topic 1, we're calling the turnaround in retail. Uh, so the backdrop for this was last week we had disastrous earnings from Walmart, WMT, and Target, even more of a disaster, TGT. Um, this week it was a little bit of a different story. We had more earnings, quite a few. We had Best Buy, BBY, put the chart up for you, Dick's, DKS, Dollar Tree, DLTR. We had Nordstrom, JWN. Williams-Sonoma was the real standout, WSM. And then we had Macy's, M, I guess also a huge standout. It was much better this week than it was last week. So that was nice to see. A lot of investors had their expectations lowered after those big box flops last week. So maybe the bar was lower, Nolan. What do you think? What's your reaction to the reaction in the retail stocks this week?

It just gives you an idea of just the historic volatility that we've seen in markets this year. It is, um, Man, you get whiplash watching the price movements. I'm just thinking about last week. Target had a 1-day plunge that was the worst in the history of Target stock. I think it's traded for over 40 years. It was down 25% one day, followed by a 5% drop the next. Same thing with Walmart. You don't expect these companies— I mean, they're bastions of stability. And you don't expect them to drop that much on earnings, but they did. I think you're right, maybe it warmed the market up for what was to come this week. What stood out to me is, uh, Dick's, you know, uh, Dick's and Best Buy as an example, because both guided down, uh, sort of missed numbers, definitely missed guidance. And in the after-hours and pre-markets, both stocks were down. Um, and in the case of Dick's, it was down a lot, double digits, but it ended the day almost positive double digits. It was like an 18% intraday swing or something. So, yes, much better response to earnings this week from the retailers. I think that's really important. We've been hearing a lot of talk in the news about recession. I know we've been talking about it on this program for a long time. Not necessarily that we've seen anything in the data. It's just if you follow the stock market movement, I think everybody knows about the disaster this year so far in tech. It's not the only weakness we've seen in the markets. Consumer discretionary has actually been worse than technology, and that led us to think, well, is that the market signaling that consumer is going to be in for a tougher time ahead and we should prepare for recession? This week we got a reprieve from that, and that's really good to see.

Yeah, we've been seeing this season there has been bad reactions to bad news but also bad reactions to relatively decent news, and I guess this week we saw better reactions to lukewarm to decent news. So I guess that's a little bit of a different regime in the market. So that's something positive. Let's move on to topic 2. So topic 2, we're calling better reactions in the tech sector. We heard from a number of heavy hitters this week. We heard from Zoom Video, ZM. We heard from NVIDIA, NVDA, also from Snowflake, SNOW. And the main thrust from a number of these tech earnings was similar to the rest of the tech earnings we heard previously. Guidance was generally weak, hiring is slowing in the sector, but kind of like what we saw with the retail stocks, Nvidia sold off in the after hours on Wednesday after they reported, but a huge reversal in the Thursday session. Nolan, last week we also mentioned we were seeing early signs of bottom in the ARK-type stocks. Sort of the hyper growers with profits way out in the future. Didn't really quite follow through on the ARK-type names this week, but we did see obviously some positivity on Wednesday and Thursday. Generally, what are you seeing in tech?

[Speaker] It looks like we're getting some bottoming. Now, whether we V off the bottom, that's a completely different story, but at least the panic selling has seemed to dry up for now, which is really good. You know what we do? We focus on the fundamentals first. So we go back and read the transcripts. We want to hear from the man or woman running the place. How is business? What's our degree of confidence that we're going to get some acceleration? I think the frustrating thing for, for us, at least internally here at Left Brain, we invest based off acceleration. Some business that was growing at 20%, it's fine if they continue to grow at 20%, but what really lights us up is when they're growing at 20% and start growing at 25%. And the opposite, we've seen the opposite this year. Businesses that were growing in the '20s have massive deceleration to maybe no growth or growth a lot less than what they were before. And you've seen the stock prices sort of follow that movement. So when we go back and look at the transcripts, it'll be interesting. We did make a list, and a lot of these businesses are on our bounce-back list of companies where we are still seeing acceleration It's just a lot fewer of them than we've seen in the past. So let's hope the supply chain thing, the inflation thing, the margin profile of these businesses continue to hold up, and hopefully we've seen the worst and we can start to accelerate here from a lower base.

I agree. And Nolan, I guess I have, um, kind of a related but not exactly the same sort of question, but do we expect tech to just V-bottom, or do we expect kind of a different type of leadership as the selling starts to wane and the broader market— should investors buy the dip on tech, pile back in, or should they be looking for other opportunities?

So I think this is going to be the magic question every investor, every advisor managing any portfolio or looking at their own accounts are going to have to decide. I know the initial reaction is this anchoring. Hey, I had some stock and went from $100 to $700. It was $700 as recently as 9 months or so ago. It's back down to $400. Should I double up on that? Should I pile into that and wait for it to go back to $700? Sometimes they will. A lot of times they will not. And it depends on the business. Every one of them are different. What I will say is the strength that we've seen has been a lot more broad-based. I know the last 4 or 5 years has almost been tech and growth exclusively that's been leading the way, and there's been a lot of sectors that were left behind. That's not what we're seeing in this environment. I think you're going to have a lot of spots to pick for businesses that can continue to grow and do very well, and they don't just reside in the tech sector.

Certainly exciting that we might be looking at different types of businesses. Again, if you're taking a look at our subscription service, those who are subscribers will note, will note that the types of reports we're doing are a little bit different than they were even 6 months ago. So that's important to note. Before we go on to topic 3, we'll also ask you to like and share the video if you, if you liked it and found it useful. Subscribe to the YouTube channel to get a notification every time we come out with a new video. And also leave a comment. We'd be happy to engage with you. With that, we're going to jump right into topic 3. So topic 3, I'm calling, Nolan, what's going on in high yield. So I'm pulling back from last week's video. We mentioned high yield as one of the main indicators of a bottom. So I wanted to bring that up again this week. The HYG, the High Yield Bond Index ETF, is up just a shade under 4% this week. Is this exactly what we're looking for, Nolan, or do we need more confirmation on HYG and the high yield market in general?

No, that was really good movement in the high yield space. And just for the listeners, just so they know, high yield are generally corporate bonds, bonds that are a promise to pay from some corporation. You get interest in the meantime, and then at maturity, you get your principal back when you loan money to corporations. And these corporations all have a credit rating. Think about it like when you're in grade school, A through C. As you can imagine, the A's and B's are better than the C's, although the C's and B's tend to pay better than the A's. And we are looking at this market for liquidity because when there are signs of distress in the financial markets, it often shows up in the credit markets first. And one of the things that did have us concerned, or at least on watch so far this year, is the weakness in the high-yield markets. As a matter of fact, there are stories of new companies coming to market, or the lack thereof, because they couldn't get their bonds sold. That's a problem. I think last week the only bond of note that came to market was Carnival Cruise Line, the largest cruise line in the world, and they had to pay much more than what they thought they were going to have to pay, over 10% on a new bond issue. That's just how vicious the high-yield bond market had been until this week. So the fact that we've seen some thawing in high yield and firming in price is a really, really good sign. And for those that are of the mindset that this is a bottom and the price action this week signals the market has settled down, the I— HYG is definitely confirming that.

And Nolan, can you just talk a little bit, give us about 60 seconds on how we like to invest in high yield and the type of opportunities we're seeing.

So typically we're looking for two things when we buy high yield. First, we're looking for yields, and we want yields that are high. Uh, as of last summer, we weren't finding yields that were high. We're finding yields that were low, right around 5%, which is historically just a very low number. Now we're finding yields because of the bond and the high-yield market sell-off. I mentioned Carnival Cruise Line with a 10% coupon bond. That's kind of an outlier, but We're finding attractive opportunities in the, let's call it, 6% to 8% yield range, depending on the length of maturity. So, as you would imagine, if it's a shorter maturity, 2, 3 years, you're going to get it generally a lower yield. Credit rating matters too. But all things being equal, a longer-term 7, 8, 9, 10-year bond generally is going to yield more than a shorter-term bond, 2 to 3 years. And so what we've been talking about is sort of this barbell strategy. We can take part of your income portfolio, buy these short-term bonds, 2 years and in, and we're still finding them at 6% yields or so, 5% to 6% yield, where we think the credit risk isn't too large. So if we still have that volatility and rates still go up, the bond's only outstanding for 2 years, and then you get your coupon and interest. and then you can go look for another bond. And then on the other side of that, if rates have topped out, I think being able to lock in yields, 7, 8, in some cases 9%, for a longer period of time, I think for a lot of investors, especially for a lot of retirees who count on income, can be a very attractive solution to a well-balanced portfolio.

Great, Nolan. So anybody out there, if you're looking to, uh, build up an income portfolio, this might be the time to get started. So Give us a call. We'll put all our information down below and you can contact us. We'll have a conversation or do a portfolio review with you. So again, we've spoken about 3 topics this week. Retail seems to be turning around a bit, same with tech and high yield bonds showing a little bit of signs of life. Nolan, any last words for us as we head on out to the Memorial Day weekend?

Yes, the summer. We're here in Chicago, as you can see behind me. We're very excited. We got beautiful, a beautiful 3-day weekend, and we got the market showing us a little sunshine. So good times. And we got the final NBA weekend before we get to championship weekend. So good things, a lot to smile about.

All right, Nolan, well, folks might want to buy sunscreen stocks next week because, uh, I'm gonna be putting a lot on. So, uh, all right, we'll see you next week.