CWS Market Review – June 1, 2021

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The month of May is on the books, and it was another good one for Wall Street. The S&P 500 gained 0.55% last month. If we include dividends, then the index gained 0.70%. This was the index’s fourth monthly gain in a row, and the 11th up month of the last 14.

Interestingly, May has been a sluggish month historically for the stock market. Adding up the numbers, the Dow has lost an average of 0.22% during May.

That may sound small, and it is, but it’s quite large for an average of 125 years. By tradition, the market starts to heat up along with summer temperatures. For July and August, the Dow has gained an average of nearly 3%. That’s close to 40% of the index’s total gain for the year coming in just two months. Historically, the market acts well during the summer but then usually gets weak again shortly after Labor Day.

The stock market was down slightly today, although we’re not far from our all-time high. The S&P 500 lost only 0.05% today. Today was the fifth day in a row that the S&P 500 closed up or down by less than 0.22%.

Jobs and the Stock Market

This morning, the Institute for Supply Management said the ISM Manufacturing Index rose to 61.2 for May. That’s up from 60.7 for April. That’s a very good number. Wall Street had been expecting 60.9. Any number above 50 means that the factory sector of the economy is expanding.

I like to watch for the ISM figure for a few reasons. Although the manufacturing sector is currently above 12% of the economy, the ISM usually comes on the first business day of the month. Usually, the better the economic report, the longer the lead time. The ISM has a pretty good track record of signaling recessions. Recessions usually occur when the ISM is around 45 or less. We’re far from that.

What’s happening is that there’s clearly a lot of pent-up demand in the economy. When you keep people locked up for so long, they’re going to want to go out and spend. On top of that, the major stimulus efforts from Washington are aiding the economy. In fact, one of the major obstacles that the economy faces right now is supply bottlenecks.

The U.S. economy is at an unusual crossroads. There are 10 million unemployed, yet there’s a worker shortage. That sounds weird but here we are. Part of that, without a doubt, is due to generous unemployment benefits that are keeping folks from returning to work. Many people also face problems with childcare. And there are many people who are still cautious about returning to an office environment.

This is jobs week which means we’ll get the big May employment report this Friday. Leading up to the jobs report, we’ll get the ADP private payrolls report on Thursday. Also on Thursday, we’ll see the latest report on jobless claims. The last jobless claims report was 406,00 which was another pandemic low.

These reports are slowly getting back to normal. The last report was lower than nearly every jobless-claims report in 2009 and 2010. Bear in mind that a little over a year ago, the jobless claims figure peaked at more than six million.

For Friday’s jobs report, Wall Street expects a gain of 674,000 nonfarm jobs, and it expects the unemployment rate to fall to 5.9%.

The jobs report for April was a huge disappointment. Economists were expecting an increase of one million jobs. Instead, the U.S. economy added just 266,000. The unemployment rate ticked up to 6.1%. The jobs report was especially frustrating as more state and local economies are getting back to normal. One analyst said, “This might be one of the most disappointing jobs reports of all time.”

I have to agree. Plus, it came at the same time we got reports that job openings were at an all-time high. Bloomberg reports that “many employers say they are unable to fill positions because of ongoing fears of catching the coronavirus, child-care responsibilities and generous unemployment benefits.” There are two million more job vacancies than new hires. That’s the highest on record.

Here’s a chart of the stock market in blue and the unemployment rate in red. It’s a fascinating chart.

Historically, what’s been the relationship between unemployment and the stock market? To find out, I went over to the Bureau of Labor Statistics and downloaded all the monthly unemployment numbers since 1948. That’s when the series begins. I then went to Professor Robert Shiller’s data library (a great resource) and downloaded all the monthly inflation-adjusted returns of the stock market since 1948. (His numbers go way back.)

I then separated the data into four roughly equal groups. When the unemployment rate has been 4.65% or less, stocks have averaged 4.82% annualized.

When the unemployment rate has been between 4.65% and 5.69%, stocks have averaged 4.81% annualized. Almost exactly the same as the first group.

Now things get interesting. When the unemployment rate has been between 5.69% and 7.28%, stocks have averaged an 8.42% annualized returned. The worse for jobs, the better for stocks, which makes sense.

Now for the final group. When the unemployment rate has been greater than 7.28%, stocks have averaged an annualized gain of 14.87%. That’s quite good.

Very roughly, the tripping point appears to be 6%. Below that, stocks have averaged 3.85%. Above 6%, stocks have gained 15.50%. It’s far from a perfect relationship but it illustrates Warren Buffett’s famous dictum: “Be fearful when others are greedy, and greedy when others are fearful.”

Another sign of a return to normalcy is that the price for oil got to a two-year high today. OPEC and its allies are adjusting to surging demand but they’re trying to do it carefully. Oil is already up 30% this year.

Stock Focus: Mueller Industries (MLI)

One of the most-requested features I run is when I highlight a not-well-known company with a great long-term track record.

A perfect example of this is this week’s stock in focus, Mueller Industries (MLI). Mueller is a leading manufacturer of copper, brass, aluminum and plastic products. This is a classic small-cap cyclical stock. Once you realize the scope of their business, you understand that the use of Mueller’s products is seemingly endless. Mueller makes everything from copper tubing and fittings to brass and copper alloy bars and refrigeration valves.

You can find Mueller most anywhere. Some of the companies that rely on Mueller are in sectors like plumbing, heating, air conditioning, refrigeration, appliance, medical, automotive, military and defense, marine and recreational. Mueller’s operations are located throughout the United States and in Canada, Mexico, Great Britain, South Korea, and China.

Mueller has about 5,000 employees and it’s based in Collierville, Tennessee. The company’s operations are divided among three divisions: Piping Systems, Industrial Metals, and Climate.

MLI’s current market cap is about $2.7 billion. Mueller pays out a quarterly dividend of 13 cents per share. That gives the stock a dividend yield of about 1.1%. Mueller traces its roots back to 1917.

Last year, when Covid first hit, shares of MLI got chopped in half within a few weeks. The stock fell from $34 to $16. Since then, the shares have roared back. Recently, MLI broke above $48 per share. That’s a remarkable turnaround. Over the last 30 years, MLY has gained 132-fold (including dividends).

Let’s look at some numbers. A few weeks ago, Mueller reported very good numbers for Q1. The company made $1.11 per share which nearly doubled the 57 cents per share one year ago. The rise in copper prices has been a big help for Mueller.

Last year, Mueller made $2.47 per share. I think the company has a decent shot of making $4 per share for this year. If I’m right, that means the stock is going for less than 12 times this year’s earnings.

One of the best valuation metrics to follow is Enterprise Value/EBITDA. For Mueller, that’s currently just under 9.57 which is very good. In fact, I think it would be quite reasonable to pay 20% more than that. In February, Muller raised its quarterly dividend by 30% to 13 cents per share.

Best of all, zero Wall Street analysts follow the stock. Keep an eye on Mueller. This could be a big winner in the months ahead.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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