We have a national election on November 5. RealClearPolitics.com has a subsite called RealClearPolling.com where they track different polls and betting websites for the election. READ MORE
The US Port Strike
A large labor strike which has received little attention started today. 45,000 members of the International Longshoremen’s Association (ILA) went on strike, affecting 36 ports on the East and Gulf Coast. It is estimated that the strike will affect close to 50% of US imports and exports. For the month of July 2024, US imports and exports were $345.4 billion and $266.6 billion, respectively.
The US Maritime Alliance (USMA) represents major shipping lines as well as terminal operators and port authorities on the East and Gulf Coasts. While the strike could be the most disruptive work stoppage in decades, the two parties that are negotiating do not appear to be close to any agreement. ILA President Harold Daggett said, “We are prepared to fight as long as necessary, to stay out on strike for whatever period of time it takes, to get the wages and protections against automation our ILA members deserve.”
US exports represent about 10% of US GDP. Some retailers expect the cessation of imports to cause inventory shortages within a week if the strike is not settled. In support of the ILA, the Teamsters Union released a strongly worded statement and told the US Government to stay out of the fight and that any workers “should be able to fight for a better life free of government interference.” The ILA is demanding a total ban on the automation of cranes, gates, and moving containers in the loading and unloading of freight, along with significantly higher wages. While the USMA offered 50% wage increases over six years, the ILA is sticking to its initial demand of 77% over six years.
What is the impact of the ILA strike? I posed the question to Microsoft Copilot (their artificial intelligence application) and received the following response:
The International Longshoremen’s Association (ILA) strike, which began on October 1, 2024, is having significant impacts on various sectors:
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Supply Chain Disruptions: The strike has halted operations at 36 ports along the East and Gulf Coasts, affecting a substantial portion of U.S. imports. This disruption could lead to shortages and higher prices for goods, especially as the holiday shopping season approaches.
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Consumer Goods: Items like electronics, pharmaceuticals, and imported foods (e.g., seafood, fruits, and vegetables) are likely to see price increases and potential shortages.
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Automotive Industry: Ports like Wilmington and Baltimore, which handle a significant portion of automobile imports, are affected. This could lead to delays and increased costs for vehicles.
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Agriculture: The strike impacts agricultural exports, including poultry, soybeans, and other produce, potentially leading to lower prices for farmers and higher prices for consumers.
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Retail and Small Businesses: Retailers may face challenges in replenishing stock, leading to higher prices and potential shortages. Small businesses, in particular, could struggle with the supply chain disruptions.
West coast dockworkers belong to a different union, the International Longshore and Warehouse Union (ILWU), which reached an agreement for six years with the Pacific Maritime Association in June 2023.
Some of the cargo shipments intended for the East and Gulf Coasts can be redirected to the West Coast or ports in Canada, but clearly this is not optimal. If the strike is not settled soon, the relatively high valuations of many US stocks will be hard to justify. Further complicating the economic outlook, Iran and Hezbollah are firing hypersonic missiles at Israel today, escalating the war in the Middle East further.
If you have any questions or comments, please contact me.
Sincerely,
Robert G. Kahl
CFA, CPA, MBA
The Fed’s Dilemma
Inflation expectations have subsided during the last two years. In July 2024, the US consumer price index was 2.9% compared to the prior year. According to the Federal Reserve Bank of New York’s Survey of Consumer Expectations READ MORE
The State of US Households
US household consumption represents 70.3% of GDP, so economists evaluate the financial health of US consumers when they make their forecasts. READ MORE
U.S. Corporate Profits
S&P 500 earnings declined in 2022 by 18.0% and subsequently increased by 7.8% in 2023. Standard and Poor’s currently estimates that 2024 earnings for the S&P 500 index will be $216.61, representing 10.6% growth for the calendar year. At the current price level of 5,283.4, the S&P 500 Index sells at 24.4x 2024 estimated earnings.
There has been much commentary about the “Magnificent 7” (Microsoft, Amazon, Meta Platforms, Apple, Alphabet, Nvidia, and Tesla). The Magnificent 7 sell for roughly twice the P/E ratios than most other US stocks. While five of the stocks have high growth rates, Apple and Tesla have negative revenue growth when we compare the most recent quarter to a year ago.
Richard Bernstein Advisors (RBA) has this to say in their commentary about the divergence between the large cap tech stocks and the rest of the stock market.
Our work in the early-1990s demonstrated that stock market leadership narrows when profits cycles decelerate because fewer and fewer companies can accelerate or even maintain growth in an increasingly adverse environment. Markets effectively reflect Darwinistic survival of the fittest as earnings growth becomes increasingly scarce.
However, the opposite occurs when profits cycles accelerate. Markets tend to broaden as the cycle accelerates because an increasing number of companies are growing, and investors become comparison shoppers for growth.
RBA notes that a high percentage, 32% of S&P 500 companies, have more than 25% earnings growth based on the last 4 quarters. In their opinion, “profits are accelerating and credit conditions remain healthy.” They expect the performance of the stock market to broaden and the Magnificent 7 to “substantially underperform.”
The Atlanta Fed’s GDPNow forecast for the second quarter has declined during the last month from 4.1% to 1.8%. A slowdown in economic growth will make it difficult to sustain earnings growth for many companies.
One of the reasons why small capitalization companies have been underperforming the S&P 500 since 2021 is that they typically have a higher debt load with a greater proportion of variable rate debt. Interest rates have been rising since June 2020, so small companies with more interest-sensitive debt have suffered. According to Pacer Financial, an ETF provider, the S&P Small Cap 600 has net debt/EBITDA (earnings before income tax, depreciation, and amortization) of 3.5 compared to 1.4 for the S&P 500.
Pacer’s US Small Cap Cash Cows ETF (CALF), which is included in many portfolios, has a lower ratio of net debt/EBITDA at 1.26, but sells at a more attractive valuation than either index. CALF has a price/free cash flow ratio of 8 and a price/earnings ratio of 11.
While there are reasons to be concerned about the economic future of the country (see my May 3 blog, “Prepare for All Eventualities), some stocks offer better fundamentals and more attractive valuations than other stocks. Also, we deal in a world of probabilities rather than certainties, and an allocation to common stocks makes sense as a hedge against inflation.
If you have any questions or comments, please contact me.
Sincerely,
Robert G. Kahl
CFA, CPA, MBA