Monday Tee Up: Here Comes Big Tech

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are Laboratory Corp. Of America Hl (LH); Micron Technology Inc. (MU); Oracle Corp. (ORCL); Invesco Ltd (IVZ) and the Focus List deletions are Advanced Micro Devices Inc. (AMD); American Express Co. (AXP); Crowdstrike Holdings Inc (CRWD); Unitedhealth Group Inc (UNH).

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

Stocks rose on Thursday as investors digested new data. Initial jobless claims were 221,000 for the week ending March 30, up from last week's revised 212,000 and above expectations. Ongoing unemployment declined to 1,791,000 from the previous week's revised 1,810,000. The U.S. trade deficit was $68.9 billion in February, an increase of 1.9% from January. Exports of goods increased $5.0 billion, led by aircraft (+$1.4 billion) and crude oil (+$1.1 billion), while exports of passenger vehicles declined $0.9 billion. Imports of goods rose $4.7 billion, led by cell phones and household goods (+1.4 billion) foods, feeds and beverages ($1.3 billion), and automobiles and parts (+1.1 billion). The Dow was up 0.4%, the S&P 500 rose 0.7% and the Nasdaq gained 0.9%. Crude oil traded above $85 per barrel, while gold traded near $2313 per ounce.

Stocks rose on Thursday as investors digested new data. Initial jobless claims were 221,000 for the week ending March 30, up from last week's revised 212,000 and above expectations. Ongoing unemployment declined to 1,791,000 from the previous week's revised 1,810,000. The U.S. trade deficit was $68.9 billion in February, an increase of 1.9% from January. Exports of goods increased $5.0 billion, led by aircraft (+$1.4 billion) and crude oil (+$1.1 billion), while exports of passenger vehicles declined $0.9 billion. Imports of goods rose $4.7 billion, led by cell phones and household goods (+1.4 billion) foods, feeds and beverages ($1.3 billion), and automobiles and parts (+1.1 billion). The Dow was up 0.4%, the S&P 500 rose 0.7% and the Nasdaq gained 0.9%. Crude oil traded above $85 per barrel, while gold traded near $2313 per ounce.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

Our stock/bond asset-allocation model, which we call the Stock-Bond Barometer, is indicating that bonds are the asset class offering the most value at the current market juncture. But not by much. Our model takes into account current levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The model output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks, of 0.16 sigma, with a standard deviation of 0.98. The current valuation level is a 0.18 sigma premium for stocks, which is down sharply from a 0.85 sigma premium at the end of 3Q23. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 19, which is within the normal range of 13-24 and down from 23 in 2021. The current S&P 500 dividend yield of 1.4%, while below the historical average of 2.9%, is up from an ultralow 1.2%, also in 2021. And that current S&P 500 dividend yield is 33% of the 10-year Treasury yield, compared to the long-run average of 39% and the all-time low of 18% in 1999. Looking ahead, we expect the results from our stock/bond valuation model to favor stocks, as interest rates head lower in 2024 and EPS growth picks up. Based in part on the output from our Stock-Bond Barometer, our current recommended asset allocation model for moderate accounts is 73% growth assets, including 68% equities and 2% alternatives; and 27% fixed income, with a focus on Core and Opportunistic segments of the bond market.

With earnings season officially under way, the weekly volume of insider transactions reported by Vickers Stock Research has hit cyclical lows and is likely to stay down for multiple weeks. That said, the clear feature characteristic of the transactions that were executed last week is ongoing selling by insides at companies that list of the tech-heavy Nasdaq.

Dividend income is often overlooked amid gyrations in the stock market. But dividends are an important element of return. Dividend income accounted for 42% of the total return of the S&P 500 between 1930 and 2012, according to Hartford Funds. And that's just the average. In some of those decades, dividends accounted for more than 50% of total returns and even 100% of returns. More recently, dividends have accounted for a smaller portion of returns, at around 15%-20%. Not all dividends are created equal, though, and it is important to understand the difference between the two main categories: high-yield stocks and dividend-growth stocks. High-yield stocks typically have dividends that pay out in the 5%-8% range. Though the income appears attractive, the share prices of high-yield stocks may be at risk. Dividend-growth stocks typically have lower yields, often in the 1.0%-2.5% range. But the lower-yielding dividends are not likely to be a huge component of cash flow, leaving management teams with other value-additive options for deploying cash. Further, while the yields are not as high, management teams may be more likely to boost the payouts over time, as earnings grow.

Perspective is very important when analyzing the stock market. We know that a few stocks have accounted for most of the 21% year-to-date gain in the S&P 500 (SPX). And after another nice day on Tuesday, the index is only 3.2% from its January 3, 2022, all-time closing high (ATH) of 4,796.56. That's a long comeback from the 2022 bear market (-25%).

Our bond/stock asset-allocation model indicates that bonds remain the asset class offering the most value. But stock valuations are much improved, in response to the decline in the benchmark 10-year government bond yield. Our model takes into account current levels and forecasts of short- and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks, of 0.16 sigma, with a standard deviation of 1.0. The current valuation level is a 0.22 sigma premium for stocks, not far from fair value and down from a 0.98 sigma premium two months ago. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is 17.1, within the normal range of 10-21 and down from 22 a year ago. The current S&P 500 dividend yield of 1.6%, while below the historical average of 2.9%, is up from an ultralow 1.2% as recently as 2021. We expect results from our valuation model to continue to improve, as interest rates decline into next year and EPS growth picks up. Based on the current valuation levels, as well as interest rate and earnings forecasts, we called for a recovery in stock prices in 2023 from bear-market lows and in July set a year-end 2023 S&P 500 target of 4,600. That still holds. Our recommended asset-allocation model for moderate accounts is 67% growth assets, including 65% equities and 2% alternatives; and 33% fixed income, with a focus on core and opportunistic segments of the bond market. On duration, we recommend the short end of the curve.

Management's ability to "raise guidance" can often be a catalyst for market-beating returns in the quarters ahead. The third-quarter earnings season is wrapping up, with blended earnings (actual results and the consensus for those still to report) showing a 6.3% gain, year-over-year, according to Refinitiv. That is considerably better than the 1.0% expected at the start of the earnings period, and should be enough to end the "earnings recession" that investors have endured over the past three quarters. Propelling the 3Q outperformance were strong gains in Communication Services, up 46%, while Energy again (like last quarter) is performing the worst, down 33%. Our analysts are always on the lookout for companies that boost their outlooks during earnings season. Here is an initial list of BUY-rated companies in Argus Coverage at which management raised guidance or increased its outlook during the 3Q23 EPS reporting season.

Stocks ended Wednesday with small gains and off intraday highs. That's still impressive after Tuesday's returns. The major indices all gained 0.1% to 0.5%, with the best being the S&P MidCap 400. Bonds gave back some of their gains from Tuesday and the dollar took back some of its Tuesday losses.

The Fed's favorite inflation indicator, the PCE Price Index, will be released by the BEA this morning. The index differs from the better-known Consumer Price Index in that its composition is changed more frequently and is quicker to reflect real-time pricing fluctuations. In the August report, PCE inflation was reported at 3.3% (the latest CPI report, from September, had inflation at 3.7%). Core PCE, which removes volatile food and energy prices, was 3.9% in the latest month, down from 4.3% in the prior month. Our forecasts call for relative stability on both rates: 3.5% for the headline number and 3.7% for the core reading. Inflation appears to have peaked in summer 2022 and is on a downward trek, though the rate of decline is stalling a bit. We track 20 inflation measures on a monthly basis. On average, they indicate that prices are rising at a 3.1% rate-year-over year, up from 2.8% two months ago. The numbers are distorted somewhat by a sharp decline in Producer Price Intermediate Goods, which are falling at a 21% rate and likely point to easing prices across the inflation spectrum. Focusing on core inflation, our reading is 2.98%, down 40 basis points month-over-month. That's lower largely because, at long last, sticky prices like shelter and transportation are starting to ease (the Sticky Price Core CPI Index reading is 5.1%, down from 5.6% two months ago). Investors are expecting that the Federal Reserve's series of rate hikes ultimately will tame inflation, with the five-year forward expectation rate at 2.4%.

Since October 17, the stock market has been hammered with selling. Over seven trading sessions, the S&P 500 (SPX) has given up 5.4%, while the Nasdaq, Nasdaq 100 (QQQ), S&P MidCap 400 (MDY), and Russell 2000 (IWM) are all off between 6% and 7%. The S&P 500 has clearly broken below its key 200-day and 50-week moving averages for the first time since March. The 38.2% retracement of the rally since October 2022 at 4,178 has given way and the cluster of support near 4,200 has been lost. A 50% retracement of the rally since October 2022 sits at 4,049 and a 61.8% giveback targets 3,918. Looking out into early December, long-term trendline support off the lows in 2011, 2018, and 2022, comes in at 4,040.

The 10-year Treasury yield rose 83 basis points (bps) on October 16; the five-year yield popped 73 bps; and the two-year rose five bps. Yet to everyone's surprise, the stock market posted some very nice gains that same day. There are times when investors start to ignore (or simply get used to) conditions that have been bothering them for months and start trading stocks on their merits. Still, even with the recent increase, yields have not yet reached recovery highs. With third-quarter earnings season upon us, investors now have something else on which to focus.

Argus has published its latest Portfolio Selector, which features its popular Focus List. Each month, Director of Research Jim Kelleher, CFA, surveys the team of Argus Research industry analysts for their timeliest recommendations out of the company's fundamental universe of approximately 500 stocks. The Focus List typically includes 30 stocks: turnover is high, as Jim typically adds three or four new stocks per month. Below are the latest additions, all of which are rated BUY at Argus.

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are MongoDB Inc (MDB); General Mills, Inc. (GIS); Unitedhealth Group Inc (UNH); TJX Companies, Inc. (TJX) and the Focus List deletions are Merck & Co Inc (MRK); J.M. Smucker Co. (SJM); Splunk Inc (SPLK); Ulta Beauty Inc (ULTA).

It is arguable that the stock market had every reason to break down on Friday after the unexpectedly robust September jobs report, which initially sent stock futures lower and bond yields to new recovery highs. But following the initial panic, investors noticed that the report showed that the trend in wage growth continued to soften -- and once the algorithmic selling on the initial number played out, cooler heads prevailed. The S&P 500 (SPX) ended up 1.2%, the Nasdaq added 1.6%, and the Nasdaq 100 (QQQ) rose 1.7% as Treasury yields retreated for the rest of the session.

The first-quarter earnings season has passed the halfway mark with 292 (or 58%) of S&P 500 companies having reported results through August 1. An impressive 81% of those companies exceeded earnings expectations, while the blended (actual and still to report) earnings decline is now projected at 5.9%, according to Refinitv. The Consumer Discretionary sector still leads with 36% earnings growth, while Energy is now by far the weakest sector, with a 48% profit decline. Our analysts are always on the lookout for companies that boost their outlooks during earnings season. Management's ability to "raise guidance" can often be a catalyst to market-beating returns in the quarters ahead. Here is an initial list of BUY-rated companies in Argus Coverage for which management has raised guidance or increased its outlook during the 2Q23 EPS reporting season.

Stocks were mixed on Tuesday morning following earnings from Bank of America and Morgan Stanley and new retail sales data. Bank of America shares rose 4% after the company reported strong 2Q earnings, helped by growth in net interest income. Morgan Stanley shares also rose, despite lower second-quarter earnings, after management projected generally stronger results in the second half of the year and in 2024. Retail sales were weaker than expected. The Commerce Department said that U.S. retail sales rose 0.2% in June, down from a revised 0.5% in May and below the Reuters consensus forecast of 0.5% growth. The Dow rose 0.8%, the S&P rose 0.2%, and the Nasdaq fell 0.2%. Crude oil traded near $75 per barrel, while gold jumped $28 to $1984 per ounce.

Dividend income is often overlooked amid gyrations in the stock market. Thus far in 2023, market bulls are boasting about first-half S&P 500 returns that may top 15%. No one is very focused on the broad market index's 1.6% current yield. But dividends are an important element of return. Dividend income accounted for 42% of the total return of the S&P 500 between 1930 and 2012, according to Hartford Funds. And that's just the average. In some of those decades, dividends accounted for more than 50% of total returns and even 100% of returns. More recently, dividends have accounted for a smaller portion of returns, at around 15%-20%. In 2018, dividend payments softened the blow when most market indices declined as the Fed hiked rates. The pattern was repeated in 2022. Not all dividends are created equal, though, and it is important to understand the difference between the two main categories: high-yield stocks and dividend-growth stocks.

Our bond/stock asset-allocation model is indicating that bonds are the asset class offering the most value at this market juncture, as interest rates have risen over the past few quarters and stocks have recovered some of the ground lost last year. Our model takes into account current levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The model output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks, of 0.15 sigma, with a standard deviation of 1.0. The current valuation level is a 0.74 sigma premium for stocks, which is inside the normal range but up from the 0.56% sigma premium a month ago. Other measures also show reasonable valuations for stocks. The current forward P/E ratio for the S&P 500 is 17, which is within the normal range of 10-21 and down from 22 a year ago. The current S&P 500 dividend yield is 1.6%, below the historical average of 2.9% but up from an ultralow 1.2% as recently as 2021. Based on current valuation levels, as well as our interest-rate and earnings forecasts, we are expecting a recovery in stock prices in 2023 from bear-market lows. We have established a year-end S&P 500 target of 4,300. This may change in the weeks ahead, as the market has neared our target and we remain bullish on stocks. Our current recommended asset allocation for moderate accounts is 67% growth assets, including 65% equities and 2% alternatives; and 33% fixed income, with a focus on opportunistic segments of the bond market.

The first-quarter earnings season is wrapping up, with blended earnings (actual results and the consensus for those still to report) showing a 0.6% year-over-year decline, according to Refinitiv. That is considerably better than the 5.0% decline expected at the start of the earnings period, though still not enough to avoid a technical earnings recession following 4Q's 3.4% decline. Propelling the 1Q outperformance was a 74% beat rate (versus the long-term average of 62%), with strong gains in Consumer Discretionary (+55%) and Industrials (+26%), but drags from Basic Materials and Utilities (both -22%). Our analysts are always on the lookout for companies that boost their outlooks during earnings season. Management's ability to "raise guidance" can often be a catalyst for market-beating returns in the quarters ahead. Here is an initial list of BUY-rated companies in Argus Coverage for which management has raised guidance or increased its outlook during the 1Q23 EPS reporting season.

The Vickers Top Buyers & Sellers is a daily report that identifies the five companies the largest insider purchase transactions based on the dollar value of the transactions as well as the five companies the largest insider sales transactions based on the dollar value of the transactions.

Stocks fell on Tuesday morning as investors weighed a new round of earnings reports along with a month-over-month jump in home prices. PepsiCo shares rose after the company posted stronger-than-expected 1Q results, while GM fell despite above-consensus earnings and higher full-year guidance. Meanwhile, the Case-Shiller national home price index rose 0.2% in February after a 0.2% decline in January. However, the year-over-year increase slowed to 2.0% in February from 3.7% a month earlier. The Dow fell 0.2%, the S&P 0.7%, and the Nasdaq 0.9%. Crude oil traded near $77 per barrel, while gold fell $2 to $1998 per ounce.

In this edition, a new era for Ritchie Bros.; ESG risks and opportunities crop up in food and agri; bank stocks are cheap again for now; and Scentre Group, Chart Industries, and UnitedHealth Group.

Stocks fell again on Thursday morning amid earnings reports from Procter & Gamble and Alcoa, and new employment and housing market data. The Labor Department reported that first-time claims for state unemployment benefits fell to 190,000 for the week ended January 14, down from 205,000 a week earlier and below the consensus forecast of 214,000. Housing data was slightly stronger than expected. Overall housing starts fell 1.4% to a seasonally adjusted rate of 1.382 million units in December, but topped the consensus forecast of 1.359 million. The Dow fell 0.7%, the S&P 0.9%, and the Nasdaq 1.2%. Crude oil rose 1% to $80.50 per barrel, while gold rose $14 to $1921 per ounce.

Dividend income, an important element of total return, is often overlooked amid gyrations in the stock market. Between 1930 and 2012, dividend income accounted for 42% of the total return of the S&P 500, according to Hartford Funds. And that's just the average. In some decades, dividends accounted for more than 50% of total returns and even 100% of returns. More recently, dividends have accounted for 15%-20% of returns. Still, in 2018, dividend payments softened the blow when most market indices declined as the Federal Reserve hiked rates. The pattern was repeated in 2022 as well. Not all dividends are created equal, though, and it is important to understand the difference between the two main categories: high-yield stocks and dividend-growth stocks.

Our bond/stock asset-allocation model currently indicates that bonds are very close to fair value, as rising yields have made fixed-income investments relatively more attractive over the course of the year. Our model takes into account current levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The model's output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks, of 0.15 sigma, with a standard deviation of 1.0. The current valuation level is a 0.85 sigma premium for stocks, which is inside the normal range. T-bond yields are around 3.7%, by comparison, coming closer to our fair value target yield of 4.7%. Generally, the model has done a good job of highlighting asset-class value, such as stocks in the late 1970s, bonds prior to the "dot-com" crash of 2001, and stocks once again at the depths of the financial crisis in 2009. As our chart shows, the markets can manage with premiums and discounts for extended periods of time, as interest rates and stock prices fluctuate daily. Based on the current model input levels, we have been expecting a recovery in stock prices from bear-market lows in 2H22 and are maintaining our year-end S&P 500 target of 4,100. Our current recommended asset-allocation model for moderate accounts is 70% growth assets, including 65% equities and 5% alternatives; and 30% fixed income, with 200 basis points of the bond allocation in cash.

Last week was the busiest of the quarter for corporate earnings, with a fair number of sharp moves in stock prices following above- or below-consensus results or changes in company guidance. Through October 25, Refinitiv reports that 129 S&P 500 companies have announced earnings, with 74% of those coming in ahead of the EPS consensus. The blended (reported and estimated) growth rate for the full quarter, however, is now at 3.3%. That's down from the 4.5% that was expected at the start of the quarter, which is likely a combination of the magnitude of the earnings misses as well as earnings estimates still coming down for those still scheduled to report. Sectors with the strongest beat rates so far have been Healthcare and Communication Services, where 100% of companies reporting have come in ahead of consensus. The biggest laggard has been Consumer Discretionary, where only 47% have exceeded consensus. Energy dominates, with a 119% blended earnings growth rate versus 3Q21, while Financials are at the other end with a 16% earnings decline. Our analysts are always on the lookout for companies that boost their outlooks during earnings season. Management's ability to "raise guidance" can often be a catalyst to strong returns in the quarters ahead. Here is an initial list of BUY-rated companies in Argus coverage for which management has raised guidance or increased its outlook during the 3Q22 EPS reporting season.

Stocks continued to rally on Tuesday morning as investors weighed more 3Q earnings reports. Goldman Sachs rose more than 4% after posting stronger-than-expected third-quarter revenue and earnings and announcing a business reorganization. Johnson & Johnson shares fell slightly despite above-consensus results and an increase in the company's full-year EPS forecast. The Dow rose 1.3%, the S&P 1.2%, and the Nasdaq 1.2%. Crude oil fell nearly 3% to $83 per barrel, while gold fell $9 to $1655 per ounce.

Healthcare is a sector that includes many categories and investing disciplines. It is innovative, can be either growth or value, and can involve start-ups or mature companies. A healthcare company can be built around one product that is leveraged in broad and creative ways, or a company with depth, breadth and products that have many touchpoints. Many of the companies are truly science-based, some with managers who are stronger as scientists than as executives running a company; others have scientists focus on science while practiced managers mind the books. The Healthcare sector accounts for 15% of the S&P 500, with an overall market cap of $1.4 trillion dollars. Subsectors include Biotechnology, Healthcare Distributors, Healthcare Equipment, Healthcare Supplies, Life Sciences Tools and Services, Managed Healthcare, and Pharmaceuticals. We think investors should Over-Weight the sector and consider allocating about 15% of their diversified portfolios to stocks in the sector. Healthcare is slightly outperforming the S&P 500 thus far in 2022, with a loss of 14% compared to the 25% loss for the S&P 500. The following are some Argus BUY-rated Healthcare companies. The stocks were selected using the Argus screening tool and the following criteria: BUY-rated; large-cap (greater than $8 billion market capitalization); a Financial Strength rating of Medium-High or High; and paying a dividend. We feel these companies currently are best in class for the sector. Some are also part of our model portfolios (Growth & Income, Equity Income, Growth, and Institutional).

Our bond/stock asset-allocation model indicates that both stocks and bonds are overvalued, despite sell-offs in both asset classes in 2022. Our model takes into account current levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks, of 0.15 sigma, with a standard deviation of 1.0. The current valuation level is a 0.7 sigma premium for stocks, well within the normal range. The model has done a good job of highlighting value. Stocks were very attractive compared to bonds in the late 1970s, when benchmark Treasury rates were in the high teens before heading consistently lower. The model indicated that stocks were at a sharp premium to fair value compared to bonds prior to the "dot-com" crash of 2001 and prior to the Great Recession. In 2009, at the depths of the financial crisis, the model indicated stocks were deeply oversold -- another good call. Markets can manage with premiums and discounts for extended periods. Based on the current model, we are expecting a recovery in stock prices from bear-market lows in 2H22 but have revised our year-end S&P 500 target to 4,000 as interest rates rise. Our current recommended asset allocation for moderate accounts is 70% growth assets, including 65% equities and 5% alternatives; and 30% fixed income, with 200 basis points of the bond allocation in cash.

Market breadth continues its intermediate- to long-term healing from extremely oversold conditions in June. Shorter measures of breadth cycled into overbought territory by the middle of August, while intermediate- and long-term measures will take months to fully heal and cycle back to strong levels. Of course, all of this assumes that the June lows were also the bear-market lows -- and while there have been many positive signs of late, it is still too early to know.

Last week was the busiest of the quarter for earnings, with many sharp stock-price moves following above- or below-consensus results or changes in guidance. Through July 26, Refinitiv noted that 133 S&P 500 companies had reported earnings, with 76% beating expectations, above the long-term average of 66%. The blended (actual for those reporting and consensus for those still to report) growth rate is 6.2%, near the 5.6% expectation and indicating the "beats" have not been robust. But the sour mood coming into the quarter is being greeted with relief that profit shortfalls and lowered guidance are not rampant. Our analysts always look for companies that boost outlooks during earnings season. Raising guidance can be a catalyst for strong returns in the quarters ahead. Here is an initial list of BUY-rated companies in Argus coverage with raised guidance or increased outlooks during the 2Q22 EPS reporting season.

Monday Tee-Up: Fed, Inflation Data, GDP, and Earnings

The Vickers Top Buyers & Sellers is a daily report that identifies the five companies the largest insider purchase transactions based on the dollar value of the transactions as well as the five companies the largest insider sales transactions based on the dollar value of the transactions.

Dividend income, an important element of total return, is often overlooked amid gyrations in the stock market. Between 1930 and 2012, dividend income accounted for 42% of the total return of the S&P 500, according to Hartford Funds. And that's just the average. In some decades, dividends accounted for more than 50% of total returns and even 100% of returns. More recently, dividends have accounted for 15%-20% of returns. Still, in 2018, dividend payments softened the blow when most market indices declined as the Federal Reserve hiked rates. The pattern is being repeated in 2022 as well. Not all dividends are created equal, though, and it is important to understand the difference between the two main categories: high-yield stocks and dividend-growth stocks.

The Vickers Top Buyers & Sellers is a daily report that identifies the five companies the largest insider purchase transactions based on the dollar value of the transactions as well as the five companies the largest insider sales transactions based on the dollar value of the transactions.

We have not talked much about small-cap stocks as they have steadily underperformed the S&P 500 since February 2021 and the S&P MidCap 400 since January 2021. Both the Russell 2000 (IWM) and the S&P SmallCap 600 (SML) peaked in November 2021 and have been tracing out lower lows and lower highs ever since. At the June 16 closing low, the IWM had cratered 32% while the SML had given up 26%. Interestingly, the hyper-revenue-growth/no-EPS stocks peaked in late 2020 and early 2021, well before the small-caps. The Nasdaq, QQQs and the S&P 500 all peaked in late 2021/early 2022.

May had a little bit of everything, with wild day-to-day swings, a consistent but short downtrend, a few big bullish reversal candles, and (fortunately) a nice bounce at the end of the month. After all those gyrations, the major indices finished basically flat for the month. The S&P 500 was flat, the Nasdaq lost 2%, and the QQQs gave up 1.6%. That is a win after the lousy monthly returns so far this year.

While stocks continue to hold (by a whisker) important chart support from the January through March lows, WTI has calmed quite a bit. The five-day rate-of-change has fallen to zero from two trips over 20% in March and one trip over 11% in April. Crude oil was at $102 Wednesday, down from $130 in early March and up from $93 on April 11. WTI might be tracing out a triangle and the further we move toward the apex, the more price volatility shrinks. Triangles can break both ways. The chart pattern, along with the shrinking volatility in stocks or commodities, sometimes suggests that a big move one way or another is coming.

Stocks rose on Tuesday morning as investors weighed 1Q earnings reports from a range of major companies. Johnson & Johnson shares rose 3% following better-than-expected first-quarter earnings and a significant dividend hike. However, the company also lowered its full-year earnings forecast due to strength in the U.S. dollar and suspended guidance for COVID vaccine sales. On the economic front, the IMF lowered its 2022 global growth forecast to 3.6%, down from a prior 4.4% and growth of 6.1% in 2021. The Dow rose 1.0%, the S&P 1.2%, and the Nasdaq 1.6%. Crude oil fell more than 4% to about $103 per barrel, while gold fell $32 to $1954 per ounce.

During the current rally, we have seen improvement in market breadth indicators -- although some remain bearish while others are only neutral. In the S&P 500, 62% of stocks are above their 50-day average (all breadth data as of the 3/25 close) from a February low of 24%, while 53% are above their 200-day, up from a recent low of 36% (which was the weakest level since June 2020). Generally, large market declines happen when this measure falls and stays below 45%, so we would like to see more improvement for the average stock in the S&P 500.

The first quarter of 2022 continues to get uglier, with most of the major indices closing at new corrective lows. The S&P 500 surrendered 3% on Monday, the Nasdaq gave up 3.6%, the QQQs plunged 3.7%, the S&P 400 got whacked for 3.8%, and the Russell 2000 (IWM) lost 2.4%. The only index that did not close at a new corrective low was IWM and none of the indices made intraday lows. The "500" is off 11.9% for 2022, the Nasdaq and the QQQs have given up 18%, MDY is down 11%, and IWM is off 13%.

The Vickers Top Buyers & Sellers is a daily report that identifies the five companies the largest insider purchase transactions based on the dollar value of the transactions as well as the five companies the largest insider sales transactions based on the dollar value of the transactions.

West Texas Intermediate (WTI) closed at $87.15/barrel on Thursday after hitting $88.54 intraday, the highest level since October 2014. The next Fibonacci extension based on the ABC reversal that crude traced out in December targets $91. WTI has cycled into mildly overbought territory on a daily basis and the move since late December has been pretty steep -- so this action appear to be getting a little long in the tooth.

Stocks rebounded on Thursday morning following positive earnings reports from Travelers and Baker Hughes, a day after the Nasdaq dropped into correction territory. On the employment front, the Labor Department said that first-time claims for state unemployment benefits rose to 286,000 for the week ended January 15, up from 231,000 a week earlier and above the consensus forecast of 225,000. The Dow rose 1.2%, the S&P 1.3%, and the Nasdaq 1.8%. Crude oil rose to near $88 per barrel, while gold fell $3 to $1840 per ounce.

Often overlooked amid gyrations in the stock market is dividend income, which is an important element of total return. Between 1930 and 2012, dividend income accounted for 42% of total return of the S&P 500, according to Hartford Funds. And that's just the average. In some decades, dividends accounted for more than 50% of total returns and even 100% of returns. More recently, dividends have accounted for 15%-20% of returns. Still, in 2018, dividend payments softened the blow when most market indices declined as the Federal Reserve hiked rates. But not all dividends are created equal, though, and it is important to understand the difference between the two main categories: high-yield stocks and dividend-growth stocks.

Our bond/stock asset-allocation model indicates that stocks and bonds - both of which are overvalued against their own metrics - are near fair value against each other. Our model takes into account current levels and forecasts of short-term and long-term fixed-income yields, inflation, stock prices, GDP, and corporate earnings. The output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks of 0.15 sigma, with a standard deviation of 1.0. The current valuation level is 0.12 sigma premium for stocks. Generally, the model has done a good job of highlighting asset-class value. Stocks were very attractive compared to bonds in the late 1970s, when benchmark Treasury rates were in the high teens before heading consistently lower. The model indicated that stocks were at a sharp premium to fair value compared to bonds prior to the "dot-com" crash of 2001 and at a premium prior to the Great Recession. In 2009, the model favored stocks over bonds - another good call. Markets can manage with premiums and discounts for extended periods. But the high valuations on stocks (currently about 50% above fair value) leave little room for disappointment. Our current recommended asset allocation model for moderate accounts is 70% growth assets, including 65% equities and 5% alternatives; and 30% fixed income, with 200 basis points of the bond allocation in cash.

So far, it has been a very good year for U.S. stocks -- and with favorable seasonals, we could see additional gains before the ball drops. Starting at the top, and looking at the major indices, the Dow Jones Transport Average is up a whopping 32%, followed by the S&P SmallCap 600, with a 29% gain. The Nasdaq 100 has popped 27%, while the S&P 100, the S&P MidCap 400, and the S&P 500 all have tacked on 25%. The Nasdaq Composite has risen 24%, the Russell 2000 has added 21%, the Dow Jones Industrial Average is up 20%, and the NYSE Composite is ahead by 18%. Pretty steady from top to bottom and it's hard to complain about such clustered returns.

The Vickers Top Buyers & Sellers is a daily report that identifies the five companies the largest insider purchase transactions based on the dollar value of the transactions as well as the five companies the largest insider sales transactions based on the dollar value of the transactions.

As we have noted recently, there has been a sharp increase in Treasury yields across the entire yield curve. At the start of September, two-year notes were yielding 0.2%. As of the close on Monday, they were at 0.44%. The five-year note has risen from 0.78% to 1.16%, the 10-year bond has jumped from 1.31% to 1.64%, and the 30-year bond has popped from 1.92% to 2.09%. Both the two- and five-year note yields are at their highest since the pandemic began, when yields plummeted. As we have said, market rates are a great tell as generally they move before government rates (fed funds) do.

Stocks rose strongly on Thursday as investors focused on solid earnings from major banks and lower-than-expected weekly unemployment claims. First-time claims fell to 293,000, down from the prior week and below consensus. Continuing claims dropped to 2.593 million from 2.727 million a week earlier, and were also below the consensus forecast. Inflation data was mixed. The Labor Department said that its producer price index for final demand rose 0.5% in September, down from 0.7% in August and below the consensus forecast of 0.6% growth. However, producer prices were still up 8.6% from the prior year, up from 8.3% in August. The Dow rose 1.56%, the S&P 1.71%, and the Nasdaq 1.73%. Crude oil rose to $81.50 per barrel, while gold rose $4 to $1798 per ounce.