(Please enjoy this updated version of my weekly commentary from the POWR Value newsletter).
Last week started with a thud as stocks finished down on Monday as investors kept a close eye on the cyber-attack on a major U.S. pipeline. While the Dow hit an intraday record earlier in the day, it slid in the afternoon. Value stocks were relatively flat, while growth stocks, represented by the SPDR S&P 500 Growth (SPYG) ETF, lost 2%. Value stocks performed better as shares are still trading at an attractive level.
This continued Tuesday morning until losses extended to cyclical shares by midday as inflation fears returned to the forefront. A cocktail of rising prices, labor constraints, and potentially more stimulus has added fuel to the fire that inflation could take off. The losses on Tuesday were broad-based, with 84% of S&P 500 components down on the day. Faster inflation could mean sooner rate hikes by the Fed, despite their current stated position.
Tuesday’s losses extended on Wednesday as investors continued to be terrified by inflation. The Dow Jones Industrial Average fell 681.50 points as the consumer price index rose 0.8% month-over-month for April and 4.2% year-over-year, the highest since 2008. Though, that number may look bigger than it is since inflation was so low last April.
But rising prices can weigh on corporate profit margins if companies cannot pass those costs to consumers and impact stock valuations, which are usually lower with high inflation. Once investors had a chance to digest this information, stocks rose substantially on Thursday as investors were buying on the dip even as the producer price index rose more than expected.
Stocks rallied again on Friday and extended a rebound from the selloff earlier in the week. The rise in the market was driven by fairly negative economic news as retail sales were unchanged in April, missing estimates of a 1% gain. The negative economic news was seen as a positive since it decreases the Fed’s chances of raising rates.
Stocks finished lower today as investors await the publication of minutes from the Fed’s most recent policy meeting this week.
Market Outlook
One thing is for sure. We can expect bouts of volatility to continue for some time as investors go back and forth from being bullish on the economy reopening and bearish on inflationary concerns.
When it comes to value stocks, our biggest concern is whether continued inflationary data will lead the Fed to raise rates ahead of schedule. This could put a damper on the reopening of the economy which has benefited value shares over the better part of the last few months.
But I expect the Fed to stand pat for the time being. What does this mean for our portfolio? Well, the higher volatility presents buying opportunities for stocks ranked high in the POWR Value strategy.
These stocks have exhibited consistent growth, bullish fundamentals, and lower valuations based on 31 value measures. But, if a longer market downturn talks place, we will focus on more conservative value stocks. Either way, our portfolio is in good shape to weather the inflation-driven volatility.
What To Do Next?
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What is the secret to success?
The portfolio gets most of its fresh picks from the Top 10 Value Stock strategy which has stellar +38.63% annual returns.
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All the Best!
David Cohne
Chief Value Strategist, StockNews
Editor, POWR Growth Newsletter
SPY shares were trading at $413.38 per share on Tuesday afternoon, down $2.14 (-0.52%). Year-to-date, SPY has gained 10.93%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.
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