Barron’s Weekend Summary: Affordability is still an issue, mortgage rates will remain high, and homes are sitting on the market longer
Cover Story:
-Affordability is still an issue, mortgage rates will remain high, and homes are sitting on the market longer. It all adds up to a stalled 2023 for real estate. The US housing market has left its pandemic frenzy in the rearview mirror. This year through mid-November, the 30-year mortgage has seen its largest percentage-point gain since 1972, the first full year that Freddie Mac FMCC 1.16% started collecting the data, according to Dow Jones Market Data. The Federal Reserve’s fight against inflation means the days of sky-high bidding wars, low mortgage rates, and rapid home-price appreciation are gone. Home sales in the US are projected to end the year at 5.8M—16% fewer than from 2021’s multiyear high
Interview:
-Along with partner Dan Matviyenko, Debra Netschert manages the $1.6B PGIM Jennison Health Sciences fund. The fund is down 14.53% this year, but has delivered solid returns over three years, besting 77% of its peers, according to Morningstar. Over 15 years, the fund has outperformed 87% of its peers. Barron’s interviewed Netschert recently in New York to talk about the outlook for biotech, the stocks she is most excited about, and what the recent Inflation Reduction Act means for pharmaceutical companies.
Tech Trader:
-On November 30, Salesforce - the market leader in sales and marketing cloud software—disappointed investors by forecasting less revenue than expected for the current quarter. Fiscal third-quarter billings, a metric viewed as a leading indicator for future revenue, also fell short of Wall Street consensus by nearly 10%, coming in at $6.21b, representing year-over-year growth of just 5%.
Beyond the softening financial numbers, Salesforce’s commentary about current business trends and the economy were worrisome. On the earnings call with analysts and investors, Salesforce executives said that as the third quarter progressed they began to see a “more challenging buying environment,” with customers increasingly scrutinizing every dollar spent for its return on investment.
The Trader:
The market has been strong enough that some have wondered if the bear market is over, but caution is warranted. The S&P 500’s rally this past week was enough to push the index above its 200-day moving average for the first time since April. Back then, the milestone was hit after an 11% surge, and marked the rally’s end. The index slumped once more before soaring 17% through mid-August to around 4300, before resuming declines. The rally since mid-October has taken the S&P 500 from around 3600 to more than 4000 today. But even that contains a warning. “Zooming in, the market continues to trade in a downward sloping range,” writes Warren Pies, strategist at 3Fourteen Research. “Each new high, and low, is lower than the previous.”
-Traditional defensive companies in the market are those whose day-to-day businesses aren’t affected by changes in gross domestic product, interest rates, or market fluctuations. People always need to buy toothpaste, visit the doctor, and light their homes, so earnings and sales from companies in sectors like consumer staples, healthcare, and utilities tend to hold up best even when the economy tanks. Defensive stocks have held their ground even as the S&P 500 is up 13% over the past six weeks, fueled by hopes that the Fed will pause its rate-hiking campaign as inflation peaks. But inflation remains far above the Fed’s 2% target, and Friday’s jobs report shows that getting it back there won’t be easy. Unfortunately, many defensive stocks already reflect those concerns by trading at hefty premiums to the market. Consumer-staples stocks in the S&P 500 trade at an average 22X the 2023 EPS, versus 17X times for the overall index. Utilities stocks go for 19X, and healthcare stocks for 18X. Still, it’s still possible to find some that are still attractively valued. Credit Suisse’s chief US equity strategist, Jonathan Golub, screened for S&P 500 companies that have exhibited below-average exposure to broader economic conditions, looking at how businesses have reacted to changes in various proxies for the strength of the economy. Pharmaceutical companies Pfizer, Merck, and Amgen all made the cut, and all trade well below the market multiple. The same goes for consumer-staples stocks Kroger, J.M. Smucker, Kraft Heinz, and Altria Group. Utility stocks passing Golub’s screen include Dominion Energy, FirstEnergy, Entergy, and Verizon Communications, Comcast, and Charter Communications. All look cheap. Remember, sometimes a good defense is the best offense.
Features:
-Small-caps outperformed during recessions in the 1970s and early 1980s, when the Federal Reserve was fighting high inflation, as it is now. The group has higher proportional exposure than large-caps to inflation beneficiaries, like energy. It’s also more domestic and more tied to capital spending, which is a plus if US-based manufacturers continue moving factories home. But small companies generally have less financial flexibility than large ones, which is a negative if borrowing rates stay elevated. One way for investors to add small- cap exposure is with a low-fee index fund like the iShares Russell 2000 exchange-traded fund. Then again, switching indexes might be an upgrade. The S&P SmallCap 600 index has outperformed the Russell 2000 index by more than a percentage point a year over the past five, 10, and 20 years, and has generally been less volatile. The biggest reason: S&P uses a profitability screen to admit index members.
-The holiday season is usually a reason for stores to staff up to handle the surge of shoppers. But Friday’s jobs report showed a concerning trend: Retailers are shedding workers. According to the Bureau of Labor Statistics, the retail sector lost 30,000 jobs in November. That figure is even worse if you don’t count the 10,000 jobs added in November by car and auto parts dealerships, which are included in the sector’s count. General merchandise stores logged 32,000 job losses, electronics and appliance stores saw 4,000 job losses, and home furnishings stores had 3,000 job losses.
The contrast is striking given that Friday’s employment report as a whole showed better-than-expected job growth. The U.S. economy added 263,000 jobs in November, with the unemployment rate holding steady at 3.7%.
European Trader:
British sports betting and gaming group Entain is one of those companies set to benefit from the FIFA World Cup of Football, the most-watched global sporting event. But the FTSE 100 company has a lot more going for it than a short-term soccer boost, and it may be time to consider betting on the stock. Entain employs more than 25,000 people and operates in 31 territories in 20 offices across five continents. It owns a number of brands, including Ladbrokes, Coral and PartyCasino, and has a joint venture—BetMGM—with MGM Resorts International. Its extensive portfolio across Europe, in particular, means Entain sees net gaming revenue growing by a high single-digit percentage in the final three months of the year, due to the World Cup. It expects to return to mid single-digit growth the following quarter.
Emerging Markets:
Not seven years ago, Venezuela was pumping some 2.5M barrels of oil a day, much of which made its way to US refineries. But current output is less than 700,000 barrels per day and nearly all of it passing through murky sanctions-busting channels to China.
Restoring those missing 1.8M barrels sounds alluring in today’s climate. The Biden administration has inched in that direction lately, clearing Chevron for some exports that were blocked by Donald Trump’s maximum pressure policy. Unfortunately, restoring Venezuela’s petro might quickly is also a fantasy. Chevron may eke an extra 150,000 barrels a day over the next two years out of joint ventures with state oil company Petróleos de Venezuela, says Francisco Monaldi, director of Latin American energy at the Baker Institute for Public Policy. “After that, you need investment.”
Commodities:
-Advocates of crypto argued that Bitcoin was a better version of gold because its supply is even more limited than for the yellow metal, and it’s more appealing to a new generation. The theory was that Bitcoin would hold up as well as or better than gold in times of hyperinflation. What’s more, people can carry all their Bitcoin on their smartphone. Try doing that with a brick of gold. But the crypto downturn and several major failures within the crypto industry have taken some of the shine off digital coins. Bitcoin hasn’t proved to be an inflation hedge. In fact, it has traded more like other high-risk assets, including tech stocks that thrive during eras of low interest rates but struggle when inflation causes central banks to tighten monetary policy. Meanwhile, crypto trading platforms have proven vulnerable to hacks and fraud.
Gold is trading around $1,800/oz., about where it was when the year began. The SPDR Gold Trust is down 0.3% this year, far better than the 15% decline in the S&P 500. Bitcoin is down 63%.
Streetwise:
-Wall Street does not like T. Rowe Price says Jack Hough. 15 analysts cover the stock; and none advise investors to Buy. More say to sell than hold. Hough ran a screen of US companies of all sizes that are covered by at least 15 analysts. Only Bed Bath and Beyond scores worse on average ratings. It sells housewares to people who are presumably put off by Amazon’s convenience and Target’s lack of shoebox-size coupons. Same-store sales plummeted 26% last quarter. Nevertheless, perhaps there are sufficient reasons for you to like T. Rowe Price. The company turned 50 cents of each revenue dollar into operating profit. That’s 20 cents more than Apple, which was riding high pandemic demand for its gadgets. Assets under management for T. Rowe ended the year at $1.69T, triple what they were a decade ago. Peregrine Communications, a marketing consultant, nudged the firm ahead of index giant BlackRock to the No. 3 spot on its ranking of asset manager brand awareness, behind only Fidelity and Vanguard.