Investing Update: Buy in May and Stay?
What I'm buying, selling & watching
Inflation which has been investor’s worst enemy, showed its continued signs of easing against this week. It wasn’t enough though for the S&P 500 to finish the week higher. The Dow and S&P 500 were both down slightly on the week but the Nasdaq finished off another positive week. YTD the DOW is up 0.50%, S&P 500 up 7.84% and Nasdaq up 18.27%.
It doesn't really feel like a bear market or a bull market. Even if we briefly saw the Nasdaq enter a new bull market midweek, up 20% from the low.
May is usually viewed with the traditional investor adage of sell in May and go away. That’s because November through April are historically the best months for stocks. May through October is usually weaker. But is this year a buy in May and stay?
What I’ve Learned
You can always find data to fit your narrative. If you’re always bullish, it’s easy to always find bullish charts and data. If you’re always bearish, you can always find charts to support that. Balancing your opinions versus facts is the hard part. Sometimes that means admitting you were wrong. The faster you understand this, the better investor you’ll be. It took me a while to get this. It’s never as bad as you think and it’s never as good as you think. Stay open-minded.
Positives For the US Consumer
CPI fell again, down to 4.9%. That’s the first time below 5% in two years. This is the 10th straight month of declines. It’s now at the lowest since April 2021. Shelter CPI moved down after 25 consecutive increases. I’ve said a while back that I felt shelter had peaked but it reports on such a lag that it would take time to show up in the data. As this goes downward I expect the CPI number to continue to go lower and soon inflation won’t be as big of a topic as it has been.
The US household balance sheets continue to be in excellent condition. These household debt levels relative to their net wealth have not been at these levels since the 1980s.
A few months back I shared a chart of the US personal savings rate as a % of disposable income and it was headed to zero. Well it has made a u-turn. It’s now at the highest level since January 2022. This does go into my investment thesis on buying the stock that I did below. Also prime age labor participation (ages 25-54) is the highest since 2001. We’ve seen 13 consecutive months of nonfarm payrolls coming in stronger than expected. The US consumer is in much better shape than we’re being led to believe.
The Not So Good Data
I’ve written just how vital small business is to the economy and GDP. The Small Business Optimism Index fell to the lowest level since April 2013. This causes a bit of concern for me. To be setting new lows now over what the economy and especially small businesses have all been through the past few years might be saying something.
History shows us that small cap earnings tend to lead the S&P 500 earnings both up and down. The direction that small caps are headed is downward and it’s meaningfully lower. This is another chart that could also be telling us something and if stocks take a nosedive this will be one of the charts that people look back on.
Sentiment vs Positioning
You can be bearish or negative on stocks and the economy but still say invested. Believing things aren’t the best but sticking to your investment plan says a lot about investors. From a long term prospective, I think this tells us that investor education may be the highest it has ever been. The gap of the past few years shows investors are saying nope we’ll just ride it out versus sell and try to time when to get back in.
2023 YTD
So far 2023 has been much more calm versus 2022. As the S&P 500 currently sits up 7.84% on the year, the maximum drawdown we’ve seen has only been down 8%. That’s much less volatile than the average intra-year drop of 14.3%.
What didn’t work in 2022 is working in 2023. The biggest losers in 2022 are the biggest winners so far in 2023. Deep red years of losses are usually followed with nice upside green the following year. Diversification is still an investors best friend.
Moves I’ve Made
Home Depot HD 0.00%↑ I had mentioned in my last update, Investing Update: Insider Buying Returns that I was watching Home Depot and Lowe’s LOW 0.00%↑. This week I started a position in Home Depot at $285 a share.
I compared Home Depot and Lowe’s and it came down to; Which stock did I feel was cheaper and down farther from the highs? I have locations of both near me, so which is busier? Home Depot with a P/E of 17 which is well below its historical average of 21 and down over 30% from its high won out for me. It also sports a nice 2.9% dividend. YTD Home Depot is down 8.05% . It trails the S&P which is up 7.84%. Even Lowe’s is up 2.12% YTD.
With over 50% of the homes in the US being over 40 years old repair and maintenance spending will continue. These still high home prices support investment and credit lines for people to spend back into their homes. I like when I hear how people made all their home improvements during the pandemic. Do these people own homes? There is always something people are doing or want to do with their homes.
With all the fear about housing I think this stock has been de-risked greatly. Remember lumber sits at a three year low. As the home builders have taken off, I think Home Depot has been left behind and offers some nice upside from these levels. I may be a bit early. But spring is traditionally a very strong season for home improvement retailers. If it falls on earnings but if what they say on the conference call matches what I’m seeing, I will buy more.
What I’m Watching
This upcoming week will give a real glimpse into the consumer. Earnings will be coming from Home Depot, Target TGT 0.00%↑, Walmart WMT 0.00%↑ and T.J. Maxx TJX 0.00%↑. I’m very curious to see what these companies have to say during their earnings calls.
Another reason I bought Home Depot is that I’m seeing people start again with home remodeling, additions and all of the above like during the pandemic. Our neighborhood is packed with contractors. In addition to our pool, multiple other pools are going in nearby. My pool contractor said he is just as busy now as during the peak pandemic time. There are garages going up, additions being put on. Large scale landscaping projects are happening. New roofs, new siding, new flooring going in.
There are hardly any homes for sale in the surrounding area. What used to be for sale signs filling yards across the area, now have contractor’s signs advertising that they’re doing work on a house. My hunch is with the higher interest rates, combined with no housing inventory that people are going to invest back into their current home. It’s what I’m starting to notice more and more now.
The Coffee Table ☕
Last week was Berkshire Hathaway’s annual meeting. This is always a big event with many noteworthy takeaways as both Warren Buffett and Charlie Munger sit for hours and answer questions. The two best recaps I found of what went on are from
who writes wrote Berkshire Hathaway Annual Meeting Best Of and who writes wrote Warren Buffet: "It is a different climate than it was six months ago." Both are worth the read.Barry Ritholz wrote a great post called “Glass Half-Empty” Investors. He hit the nail square on the head. Something is always breaking, there is always bad news and there are always reasons to sell stocks. But should you sell?
Eagle Rare was brought up to me a while back from a couple of my friends. This is their favorite bourbon so I had to get my own to try it out. Made by Buffalo Trace which also makes Blanton’s and E.H. Taylor. I have to say Eagle Rare is only a notch below those two. It’s a very consistent and solid bourbon. One that mixes into an old fashioned nicely or on its own straight. This has a spot on my shelf.
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Disclaimer: This is not investment advice. You should not treat any opinion expressed as a specific inducement to make a particular purchase, investment or follow a particular strategy, but only as an expression of an opinion. Do your own research.