Cramer’s Investing Club: What we learned this week and what we are watching next week

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The S&P 500 pulled back in what was a very volatile week, as investors attempted to price in the potential impact of the Omicron COVID variant and commentary from Federal Reserve Chair Jerome Powell that “the risk of higher inflation has increased.” As a result of the this updated view, Powell added that the Fed may consider speeding up the pace of its bond purchase tapering plans.

While all major averages finished the week in the red, the Nasdaq was the hardest hit as Powell comments resulted in expectations for higher longer-term interest rates over time and therefore a contraction in the multiples investors are willing to pay for longer duration stocks (think those that trade on a price-to-sales basis with actual earnings only expected to materialize far into the future).

Under the hood this week, all but two sectors closed in the red as investors made a flight to safety: utilities and real estate.  Communication services, consumer discretionary and the financials led the major benchmarks to the downside.

 While the averages are only single-digit percentage points off their highs, there has been a lot of carnage under the surface and that is where we as stock pickers see opportunity. As we noted earlier today, one of the profiles were are eyeing closely are those stocks with strong free cash flow generation and shareholder friendly capital return programs because companies with strong balance sheets, healthy dividend payments, and consistent share repurchase programs are typically ones that can withstand and find support in volatile markets.

Here is a quick look at some of the broader market measures we like to keep an eye on: The dollar index held around the 96 level. Gold pulled back to just below the $1,800 level. WTI crude prices remain under pressure, heading into the weekend in the mid-$60s region. And the 10-year Treasury has pulled back to the mid-1.3% level as investors sought out safety amidst the market volatility.

Within the portfolio we heard from Salesforce (CRM) and Marvell Technology. (Click the company name for our earnings breakdowns.)

In addition to earnings, we received a few notable macroeconomic readings this week:

• On Monday, the National Association of Realtors reported that pending home sales index advanced 7.5% in October to 125.2 (100 being equal to the level of activity seen in 2001), well ahead of expectations for a 0.8% monthly advance. However, despite the monthly advance, on an annual basis, sales were down 1.4% versus the year ago period. On the release, NAR chief economist Lawrence Yun attributed the strength to buyers on “strong financial footing” pulling forward purchase plans due to rapidly rising rental rates and an anticipated rise in mortgage rates. Looking forward, while Yun expects prices to continue to trend higher in 2022, he expects them to do so at a “gentler pace” due to “milder demand” on the back of higher mortgage rates.
• On Wednesday, the ADP National Employment Report, indicated an employment increase of 534,000 in the private-sector from October to November, ahead of the 525,000 consensus. This follows an increase of 570,000 in October and 526,000 in September. Making up the headline print by business size were increases of 115,000 in small businesses (1-49 employees), 142,000 in midsized business (50-499 employees), and 277,000 in large businesses (500+ employees). By Sector, we saw an increase of 110,000 in the goods-producing sector (+7,000 in natural resources & Mining; +52,000 in construction; +50,000 in manufacturing) and 424,000 in the service-providing sector (+78,000 in trade transportation & utilities; +10,000 in information; +13,000 in financial activities; +110,000 in professional & business; +55,000 in education & health; +136,000 in leisure & hospitality; +22,000 in other services).
• Also Wednesday, the Institute for Supply Management (ISM) reported that the Manufacturing Purchasing Managers’ Index (PMI) increased 0.3 percentage points to 61.1% in November, a tick below the 61.2% consensus. The reading points to the 18th month of expansion in both the manufacturing sector as well as the overall economy. As a reminder, any PMI reading over 50 represents expansion of the manufacturing sector, while anything below 50 indicates a contraction – how far above or below that level points to the pace. So, what we saw in November was a continued expansion in the manufacturing sector at a slightly quicker rate than what was seen in October. For some perspective, from December 2020 through November 2021, the Manufacturing PMI averaged 60.8 with a high of 64.7%, a low of 58.7%.
• On Thursday, the U.S. Department of Labor reported that in the week ending Nov. 27, initial jobless claims were 222,000, representing a weekly increase of 28,000, and was well below estimates for 240,000. The prior week’s reading was revised lower to 194,000, down from 199,000 previously reported. Importantly, the four-week moving average, used to smooth out weekly volatility, came in at 238,750, representing a decline of 12,250 from the previous week’s revised average of 251,000 (revised lower from 252,250 previously reported). This represents the lowest level for the moving average since March 14, 2020 when it was 225,500.
• On Friday, the Bureau of Labor Statistics (BLS) reported that nonfarm payroll employment increased by 210,000 in November, far below the 573,000 consensus. However, as CNBC’s Steve Liesman discussed on Friday, there is reason to believe that the BLS under-reported the headline number – a dynamic we have seen for the past few months that has led to consistent upward revisions the month following the release. Additionally, the unemployment rate declined 0.4 percentage points monthly to 4.2% in November, slightly better than the 4.5% expected. The labor force participation rate came in 61.8%, up from 61.6% in October and a tick higher than the 61.7% consensus. Average hourly earnings for all employees came in a $31.03, representing a 4.8% increase versus the year ago period, in line with expectations. Finally the U-6, a broader measure of “labor underutilization” that includes “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force,” registered at 7.8%, an improvement from the 8.3% rate seen in October.
• We also got the ISM Services PMI report on Friday, which pointed to a 2.4% percentage points advance in November to an all-time high of 69.1%, well ahead of the 65.0% expected. Like the Manufacturing PMI report, the reading points to the 18th month of expansion in both the services sector as well as the overall economy. For some perspective, from December 2020 through November 2021, the Services PMI averaged 62.1 with a high of 69.1%, a low of 55.3%.
• Lastly on Friday, the Census Bureau reported that new orders for manufactured goods advanced 1.0% in October, doubling expectations for a 0.5% gain. Additionally, on a monthly basis shipments were up 2.0%, unfilled orders were up 0.3% and inventories were up 0.8% in October. With this, the unfilled orders-to-shipments ratio stood at 6.76, down from 6.82 in September while the inventories-to-shipments to ratio stood at 1.46, down from 1.48 in September. On an annual basis, new orders were up 17.1%, shipments were up 12.7%, unfilled orders were up 5.5% and inventories were up 9.1% against the year ago period. Importantly, new orders for core capital goods (non-defense capital goods, excluding aircraft), which are tangible goods used in the manufacturing process (not sold to consumers) and therefore used as proxy for business confidence and investments, were up 0.7% monthly in October while shipments for core capital goods were up 0.4% on the month. Annually, new orders for core capital goods were up 15.6% versus the year ago period while shipments for core capital goods were up 13.2% annually.

Looking ahead, earnings season continues next week, within our portfolio we will be hearing from Broadcom (AVGO) and Costco (COST) on Thursday, after the closing bell.

Here are the earnings in the week ahead we’ll be monitoring:

Monday

• Open: Science Applications (SAIC)
• Close: Coupa Software (COUP), HealthEquity (HQY), MongoDB (MDB), Sumo Logic (SUMO)

Tuesday

• Open:  AutoZone (AZO), Conn’s (CONN), Designer Brands (DBI)
• Close:  Casey’s General (CASY), Toll Brothers (TOL), Stich Fix (SFIX), Dave & Buster’s (PLAY), PagerDuty (PD), ChargePoint (CHPT), Sentinel One (S), Couchbase (BASE)

Wednesday

• Open:  Brown-Forman (BF), Campbell Soup (CPB), Lovesc (LOVE), Photronics (PLAB), Thor Industries (THO), United Natural Foods (UNFI), Vera Bradley (VRA)
• Close:  GameStop (GME), Greif (GEF), Oxford Industries (OXM), Phreesia (PHR), Sportsman’s Warehouse (SPWH), Torrid (CURV), UiPath (PATH)

Thursday

• Open:  Ciena (CIEN), Hormel (HRL)
• Close:  American Outdoor Brands (AOUT), Chewy (CHWY), lululemon (LULU), Leslie’s (LESL), Mesa Air (MESA), Vail Resorts (MTN)

Friday

• Open: Academy Sports + Outdoors (ASO)

On the macroeconomic front, in addition to keeping an eye on the geopolitical sphere, we will be watching out for the following releases (all times ET):

Tuesday

• 8:30           Unit Labor Costs
• 8:30           Productivity
• 8:30           Trade Balance
• 3:00           Consumer Credit

Wednesday

• 10:00        JOLTS Job Openings

Thursday

• 8:30          Jobless Claims
• 10:00       Wholesale Inventories

Friday

• 8:30          CPI
• 10:00       Michigan Sentiment
• 2:00          Treasury Budget

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 (Jim Cramer’s Charitable Trust is long CRM, MRVL .)