The bulls have taken charge again here in May. Down April ended an epic 5-month run from November to March during which the market was up all 5 months and the S&P 500 gained 25.3%. We had the brief 3-6% correction we were looking for, albeit faster than we had anticipated. April’s economic and hawkish Fed worries were quickly replaced with several tamer than expected economic and inflation readings that rekindled the markets rate cut hopes, helping to ease the 10-year yield and in turn rallying the market to new all-time highs for the major indexes, except for the Russell 2000.
We welcome it. Our portfolios are positioned well and tacking on additional gains. We have been bullish on 2024 since our
Annual Forecast in December and maintained that all year – even our 2024 Outlook on pages 10-11 of the
2024 Almanac from June 21, 2023 was bullish for 2024. Our Base Case Scenario for 8-15% gain in 2024 is still on track, but I have to admit that our Best Case Scenario for 15-25% may be coming into play. However, perhaps the markets have gotten a little ahead of themselves and discretion is still the better part of valor.
Just look at these two updated seasonal charts of election years for S&P and NASDAQ. The market is clearly stretched to the upside and prone to at least a little reversion to the mean. This action does not change our outlook for further gains this year, but we doubt the market will go straight to the moon from here. We do not expect any significant downside either, maybe another mild pullback or two and some more chop at most.
During election years with a sitting president running stocks are much stronger during the Worst Six Months and tend be stronger in the last seven months of the year. We are not beholden to the “Sell in May and go Away” crowd. We reposition and adjust and take a more cautionary stance in the Worst Six Months, but by no means do we go away. Page 64 of the 2024 Almanac details our Best Six Months (BSM) + 4-Year Cycle Strategy where you get in on the midterm year BSM buy signal and hold until the next post-election year sell signal, roughly 2.5 years later.
Everyone got all excited about Dow 40000 today, but as we know big round numbers often prove difficult to blow through and the market usually falls back several times before putting that level fully behind it. S&P danced with 5000 from February to April before breaking back above it – and we may not have seen the last of S&P 5000. Nevertheless, the battle with inflation is not over either.
As you can see from our updated CPI Projection chart the data just doesn’t support the recent rosy inflation expectations from the market nor all these rate-cut hopes. Highlighted in the light shaded red box shows the last 10 CPI data points stuck in a range between 3.1% and 3.7%, averaging about 3.5%. Yesterday’s 0.3% monthly change was nothing meaningful in our view. You can see it in the orange line that if inflation continues at this pace, it will remain sticky, making it difficult for the Fed to cut soon or copiously.
Nothing has changed as far as we are concerned. The market is overreacting in the short term and will likely overreact the other way when new data disappoints. But it’s an election with a sitting president running against a previous president making uncertainty even lower, so the Worst Six Months are likely to be mild, trending higher with some ups and downs followed by a Q4 rally to even higher new highs.
Stock Portfolio Updates
Over the past five weeks through yesterday’s close (May 15), S&P 500 rose 2.9% while Russell 2000 jumped 4.0% higher. Over the same period the entire stock portfolio advanced 2.7% excluding dividends, interest on cash and any trading fees while the cash balance increased by 19.1%. Portfolio gains were broad with each segment contributing. Our Small Cap stocks leapt 30.8%, Mid-Caps advanced 5.4%, and Large-Caps added 3.2%.
A major contributor to the overall portfolio’s gain came from a 45.5% gain by Mama’s Creations (MAMA). The catalyst for the move appears to have been a well-received earnings report released in late April. Revenue growth was up double-digits and gross margins expanded substantially. MAMA is also a member of the consumer staples sector, the best sector based upon frequency of gains during the “Worst Six Months.” MAMA is on Hold. As a reminder, our standard trading guidance for our stocks is to sell half when a position first doubles. Based upon its original price when added to the portfolio and this policy, the price for MAMA to consider selling half is $7.18.
Per last month’s update, half of the remaining position in Super Micro Computer (SMCI) was sold on April 12. For tracking purposes, the average price on that day for SMCI was $909.50. This is the second time we have taken profits on SMCI, but we still hold one-fourth of the original position first established in November 2022. As of the close on May 15, accounting for profits taken to date, SMCI was up 568.1%. We remain long-term bullish for AI and SMCI appears well-positioned to continue to benefit from AI growth. SMCI is on Hold.
Prior to the market’s surge in May, its brisk retreat in April did do some damage to the portfolio. Frontdoor Inc (FTDR) was stopped out when it closed below its stop loss on April 16. FTDR has rebounded since then fueled by fair earnings released earlier this month, but the one weak area of the report was revenue was up only 3% year-over-year. This is less than inflation and will likely make it challenging for management to continue to deliver results that continue to beat estimates going forward. If you have not already closed out your position in FTDR, its current rally may be an opportune time to do so.
Inter Parfums (IPAR) was stopped out of the portfolio on April 25. It has rebounded modestly this month and was modestly higher today. Earnings were generally a disappointment coming in below expectations for both top-line revenue and bottom-line EPS. Revenue growth was a tepid 3.9% while sales outright declined in IPAR’s two largest markets. If you have not closed out IPAR, now may be a good time to consider doing so.
Despite reporting respectable revenue growth on April 25, Mcgrath Rentcorp (MGRC) was stopped out of the portfolio on the last trading day of April with a modest 7% gain. It appears Q1 results did not assuage investor concerns about rising expenses and shrinking margins. Due to broad market gains, MGRC is slightly higher now and could still be sold if you have not already done so.
Large caps Emcor Group (EME) and nVent Electric (NVT) both continued to climb higher over the last month and were at new 52-week highs this week. EME was up 82.6% as of the close on May 15 while NVT was up 66.8%. EME and NVT are on Hold.
All remaining positions not mentioned above are on Hold. Please see table below for updated stop losses. Please note, the high level of cash in the portfolio is the result of market conditions and our seasonal based overlay we apply to the portfolio that is consistent with our Seasonal Switching Strategy for the major indexes. We are not targeting a specific percentage of cash allocation.