CWS Market Review – October 11, 2022

The Nasdaq Falls to a Two-Year Low

In last week’s issue, I included a picture of Lucy holding the ball in place for Charlie Brown to kick. The reference is to how bear-market rallies tempt us into thinking the coast is clear, only to punish us again.

In this week’s issue, I’m including this update:

Once again, Lucy pulled the ball away and poor Charlie Brown went flying head over heels. That’s pretty much what happened on Wall Street over the last week.

Last week, the market gave us a brief but strong rally on Monday and Tuesday, and it’s taken it all back since then. The Nasdaq Composite closed today at its lowest level since July 28, 2020 (see chart below). Today’s intra-day low for the S&P 500 was its lowest since November 23, 2020. The index closed the day a hair above its recent low from September 30, which itself was a two-year low.

It’s a mess out there. Meta Platforms (formerly Facebook) is lower than where it was six years ago. We’re still seeing the trend I’ve talked about many times: risky stocks are getting hammered while conservative stocks are holding up relatively well. In today’s trading, the S&P 500 Low Vol Index rose 0.57% while the S&P 500 High Beta Index fell by 1.85%. It’s all about the Fed, the Fed and the Fed.

The recent selling was spurred in part by last Friday’s jobs report. To be fair, the report was a combination of good and bad news.

According to the report, the U.S. economy created 263,000 new jobs last month. That was below Wall Street’s expectations of 275,000. It also tied for the smallest monthly increase since April 2021. The unemployment rate ticked down to 3.5%.

Even though the jobs number was short of estimates, the futures market increased its odds that the Fed was going to raise interest rates by 0.75% at its November meeting. The odds are now up to 83% and the meeting is only three weeks away. I think it’s clear that the Fed intends to hike by 75 basis points in November.

More important than my opinion is the bond market’s. The one-year Treasury got to 4.28% today. That’s a 15-year high.

Also in the jobs report, the government said that the labor force participation rate fell to 62.3%. The U-6 unemployment rate, which is a broader measure, fell to 6.7% from 7% in August.

From a sector view, leisure and hospitality led the gains with an increase of 83,000, a rise that still left the industry 1.1 million jobs short of its February 2020 pre-pandemic levels.

Elsewhere, health care added 60,000, professional and business services rose 46,000 and manufacturing contributed 22,000. Construction was up 19,000 and wholesale trade climbed 11,000.

A drop of 25,000 in government jobs was a big contributor to the report missing expectations. Hiring at the state and local level is highly seasonal, so the decline points to a report that otherwise was largely in line with expectations and that shows a resilient jobs market.

Also on the negative side, financial activities and transportation and warehousing both saw losses of 8,000 jobs.

Another weak spot continues to be wages. For September, wages rose by 0.3%, which matched estimates. Over the past year, wages are up by 5%. While that sounds good, it’s less than the rate of inflation. In real terms, many Americans are seeing their wages getting cut. Inflation hurts so many folks who are already struggling. There are now 1.7 jobs per every unemployed person.

The next big test for the market will come on Thursday when the government releases the inflation report for September. The last report shocked Wall Street as it showed that inflation is still not under control.

Over the last 12 months, inflation is running at 8.26%. For Thursday, Wall Street expects to see consumer prices increase by 0.2% for September, and it expects the 12-month rate to fall to 8.1%.

The price for oil plays a major role in the inflation stats. While the price for gasoline had been dropping for several weeks, that seems to have ended about a month ago, and gasoline has been steadily increasing since then.

In last month’s report, the core rate of inflation came in at 0.6% which doubled expectations. That was a shocker. For September, Wall Street expects the core rate to rise by 0.4%. For the last 12 months, economists expect the core inflation rate to be 6.5%.

The equation is simple. Once inflation is under control, then the Fed won’t have to raised rates as aggressively. That’s good for the economy and earnings. It also takes some pressure off the dollar which has jumped higher against so many currencies. In the U.K., the Bank of England has been buying bonds in an effort to protect pension funds. The bond market there has has crumbled.

Inflation impacts so many different sectors at the same time. It’s so important that the Fed puts inflation back in its bottle.

Giving Another Look at Ansys

I’ve been a big fan of the company Ansys (ANSS) for some time. Unfortunately, I’ve not been such a big fan of the stock. The shares have often been very expensive. Very, very expensive.

Ansys makes simulation software for engineers. Whenever you see a designer working with a 3-D model on a computer screen, there’s a good chance that he or she is using Ansys software. Before building a bridge, a skyscraper or an airplane, the designer wants to make sure that it can withstand the pressure it will experience in real life.

Ansys is a classic “wide moat” company. Once a customer starts using their software, there’s a good chance he or she will become a long-term buyer. Ansys maintains an operating profit margin in excess of 35%, and their gross margin runs around 90%. That’s very attractive.

As you might guess, Ansys is not exactly a value stock, but I think there are occasions when it’s worth it to pay extra for an outstanding company. I saw a good opportunity for us to add Ansys to the Buy List. That was at the beginning of 2020 and the stock did very well for us. In 2020, Ansys gained more than 41% for us. I kept ANSS on in 2021, and it gained another 10% for us.

I loved the profits but again, I was concerned about the valuation. After some careful consideration, I decided to not include it on our Buy List for 2022. That’s a tough move to sell your winners. You can’t help but feel attached to them, but investing is about business, and loyalty to a stock is not important. The simple fact was that Ansys had become way too expensive.

As it turned out, our decision was almost perfectly timed. Shares of Ansys are down more than 50% this year. The business has been holding up well and Ansys has continued to beat expectations. In August, Ansys reported very good Q2 earnings. The company made $1.77 per share which beat estimates by 17 cents per share.

For Q3, Ansys expects earnings to range between $1.56 and $1.70 per share. For the entire year, Ansys expects earnings to range between $7.50 and $7.88 per share. For next year, Wall Street expects $8.49 per share.

That means that Ansys is going for less than 24 times next year’s earnings. That’s pricey, but it’s not bad for Ansys. It’s funny how a good stock can drop in half and suddenly, everyone’s afraid to own it. I can tell you that I’m seriously considering adding Ansys back onto our Buy List. I won’t make our final decision until late December.

Before I go, I have a quick story to share with you. In last week’s issue, I discussed how Elon Musk finally agreed to buy Twitter. I thought I’d ingratiate myself so I tweeted:

Most people recognized the line from the movie, The Manchurian Candidate. One outfit that did not was the newspaper, The Independent. My tweet is quoted at the end of their story. Apparently, old Sinatra movies don’t hold the shared cultural value I thought.

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

– Eddy

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