Valuentum Exclusive Analysis for the Discerning Investor

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Image Source: Mike Mozart

By Brian Nelson, CFA

If you’re thinking like us about the ongoing Fed rate-hiking cycle, you’re probably thinking that perhaps we’ll see another rate hike or two down the road, even if the Fed pauses at today’s September 20 meeting. However, whether the Fed pauses from here on out or executes a couple more rate hikes, it really shouldn’t matter much to long-term investors. From where we stand, the conversation about interest rates should now be shifting away from worries about elevated inflation to the future positive prospects that correspond to the work that the Fed has already done. With the market-cap weighted S&P 500 (SPY) just a stone’s throw away from all-time highs, despite aggressive contractionary monetary policy, we believe the market may start to view the existing levels of “high” near-term interest rates as dry powder for the Fed to stimulate the economy in the future, if or when it’s needed. The Fed has now built up a very nice insurance policy with little damage done to the U.S. stock market, and we think equities, particularly the stylistic area of large cap growth, may continue to reward investors as this positive view is eventually factored in. New highs may once again be in the cards, and we remain bullish on the equity markets today, despite the ominous volatility experienced the past 20+ months.

With that said, there are still signs of inflationary pressures across the economy. We’re not seeing much inflation with respect to food-at-home costs these days, as in some parts of the country the price of a dozen eggs can be had for a little over a buck now (down significantly from $3, $4 or even higher), while a gallon of milk could be had for less than $2.50, and a loaf of white bread for less than $1.50. We’re still seeing some pressures in the restaurant space as even McDonald’s (MCD) has had to raise prices for some of its bundles, and while its value offerings continue to deliver in a big way to the cash-strapped consumer, prices are moving ever so slightly higher across the restaurant arena. Some say eating out just isn’t worth it anymore. We’re also seeing prices creep up at convenience stores and bargain retailers. Housing prices continue to hold up, despite lofty mortgage rates, and many attribute this dynamic to the lack of supply coming online due to homeowners that have existing mortgages at half the prevailing rates--and in some cases, even better. Housing starts dropped more than 11% in August, to the lowest levels in years. According to Consumer Reports, used car prices have “eased” but still remain out of the reach for many, as higher interest rates are weighing on affordability. Consumers are leaning more and more on credit card debt, too.

Where inflation continues to be alive and well, however, is with respect to wages. Though most of Silicon Valley has cut some of the slack out of their businesses with widespread layoffs, perhaps punctuated by Meta Platforms’ (META) focus on efficiency throughout 2023, upward wage pressures continue as workers face higher levels of food and living expenses due to the rapid pace of inflation the past 12-24 months. The United Auto Workers [UAW] union has been on strike for several days now, asking for wage and benefit increases (+40%) that seem to be roughly twice that put forth by the Detroit 3 (+21%)--Ford (F), General Motors (GM), and Stellantis N.V. (STLA). Though liquidity is sound at the moment, a prolonged strike could end up wreaking havoc on the financials of these automakers, and the UAW seems committed to getting what it wants, seemingly at any price. Metals prices such as palladium, copper (CPER), and aluminum are facing pressure, too, in anticipation of new vehicle production eventually slowing. Though shares of Ford and GM look attractive on a discounted cash-flow basis (i.e. enterprise valuation), their tremendous fixed costs and considerable operating leverage coupled with recurring threats of worker strikes mean they won’t be finding their way into any newsletter portfolio soon, if ever. 

In other news, Microsoft (MSFT) raised its quarterly dividend ~10%, to $0.75 per share, and we continue to be huge fans of the company in the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. Apple’s (AAPL) shares could face some headwinds for technical and other reasons, but shares of the iPhone maker and other net-cash-rich, free-cash-flow generating powerhouses such as Alphabet (GOOG) (GOOGL) and even Nvidia (NVDA) – see here -- and Tesla (TSLA) – see here -- remain the places to be, in our view, albeit in a diversified portfolio, of course. Apple could also surprise to the upside, and some are saying that the iPhone 15 Pro has generated considerable interest since its unveiling. We’ve had a steady hand over the past 20+ months, generating relative “outperformance” compared to the market-cap weighted S&P 500 in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio during 2022, while positioning them presciently for the boom in big cap tech and the stylistic area of large cap growth in 2023. We expect more of the same, and for big cap tech and the stylistic area of large cap growth to continue to garner interest both as a safe haven and as a key way to capture the massive growth opportunity that has become artificial intelligence.

NOW READ: Apple’s Big “Wonderlust” Event Is Business as Usual

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Tickerized for SPY, MCD, WEN, META, GM, F, STLA, CASY, CALM, CPER, AA, CENX, AAUKF, NGLOY, MSFT, AAPL, NVDA, GOOG, GOOGL, TSLA, FCX, SCCO, GLCNF, GLNCY, BZH, DHI, PHM, LEN, KBH, LEA, MGA, ALSN, JCI, BWA, SUP, VC, GNTX, TLT, TLH, IEF, IEI, SHY, AGG, TIP, UUP, DXY, XME, NEM

Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.   

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