Stocks hoping for sunny spring days ahead

Stocks staged a late-session rally yesterday pushing shares into the green. Bearish comments from Fed uber-hawk James Bullard were not enough to derail the late session buying.

The cost of things.  Ok, based on my tagline, you are probably expecting me to write about inflation yet again. Alas, it is Friday and spring is burgeoning…somewhere under the dreariness of this past rainy week, so I will refrain, but for a day, from reminding you about inflation and all the trouble that it is causing. Let’s jump in with an adage. My regular readers know that I fancy, and often write quite often of those Wall Street maxims. Not this time, however. Today, I will go outside Wall Street and highlight an old one which you probably learned from your parents while in pre-school. April showers bring May flowers.  When we were young, our elders most likely used it to soothe our angst over not being able to play outside because of the early spring rain. To us, as kids, we were likely to interpret the statement as letting us know that “things will get better.” Fair enough if that worked for you. If you are reading this market note, you are probably not in pre-school and you now have a very different interpretation of the old sagely saw. For me, the adage reminds me that there is a cost for the bountiful beauty of springtime in full bloom, yet to grace us. In other words, you can’t get beautiful flowers, singing birds, amorous bunnies on the chase, green fields, etc., all classic hallmarks of the season, without enduring the early spring rains. No, the rains must awaken the slumbering bulbs, seeds, and trees just in time for the sun to hit those perfect elevation and azimuth angles to bring us that bliss of springtime. Ok, ok this is not master class on poetry, so let’s get to the market.

We have all heard that risk is inexorably tied to reward. We learned that from our parents long after the spring showers anecdote. Understanding its meaning is of paramount importance in investing. Clearly, one cannot get extra-market rewards without taking extra-market risk. We know this and yet investors continue to search for that one stock, bond, or whatever that is unbound to that basic risk/reward principle. When we are sure we have found the one, we are ultimately, more often than not, beaten and reminded of it. US Treasuries are said to be the lowest risking security. In fact, some refer to Treasury yields as being riskless, altogether. If you buy a 2-year Treasury note with a 1% coupon at par, you are taking on 2 types of risk. The first is market risk. If the market moves lower, the value of your investment will follow, however if you hold it to maturity, you will get back you principal in 2 years.  This brings us to the second type of risk for bonds: credit risk. When you bought the bond, you are betting that the issuer will stay liquid and healthy enough to pay your bi-annual coupons and return your principal at maturity. In the case of the US, the largest economy in the world, I suppose that it is safe to say that you are unlikely to hit any snags with those. That is why the yields offered by Treasury bonds are considered to be risk-free rates. If you agree with that notion, then any return that you get above Treasuries would only come to you for taking more risk. There is a reason why junk bonds pay much higher yields than Treasuries, because, naturally, there is a chance that those corporate issuers may miss a coupon payment and default. 

Now, stocks do not pay coupons, nor do they promise to return your principal. We invest in stocks with the hopes that they will increase in value as a company prospers in the years ahead.  In some cases, we invest in companies that are not yet even profitable, but they have great future prospects. We are clearly taking a risk that those prospects will play out successfully. If they are met, investors are expecting commensurate returns on their investments, but those returns come with a price, and that price is volatility. If you are expecting a stock to return more than the risk-free return of a Treasury, you must be willing to take more risk. The more you take, the bigger potential for success. In stocks there also exists a continuum of risk/rewards. Stocks that have been around for a long time, have proven track records of success, and are consistently profitable are clearly less risky than the aforementioned, unprofitable companies which have great potential. These proven companies are less risky and are therefore less volatile, and, most importantly, are expected to yield less impressive returns.

I meet with lots of clients who show me their portfolios and they are disappointed that they are earning less than the S&P500 or the Nasdaq.  Some of these portfolios are loaded with really solid stocks that are in fact growing, but not at the impressive pace of those popular indexes. The reason is usually because their portfolios contain lower risk, but healthy stocks. On the converse, more recently, I see portfolios that have suffered painful losses in recent months. Those portfolios also contain stocks that are solid and performing well, but are in contrast, riskier stocks with great prospects, making those portfolios more volatile. I must remind those clients, more often than you would think, that they cannot expect to make greater than market returns on the upside without taking greater than market risk on the downside.  Indeed, there is a cost for everything, especially in the investment world. It is really, really, really important to know what those costs are before entering the market. And this rainy, dreary early April, I know, will surely return some beautiful flower blooming, bee buzzing, bird singing, sunny days ahead. No matter how you choose to interpret it, April showers bring May flowers.

WHAT’S SHAKIN’

The Kroger Co (KR) shares are higher by +2.72% in the pre-market after Bank of America raised its rating to a BUY and its price target to $75. Which is positive for the stock which is currently trading above the average analyst price target of $53.  Dividend yield: 1.40%.  Potential average analyst price target upside: -10.2%.  WHY IS THIS NEGATIVE?  Because the current price of the stock is higher than the average analysts’ target.  That may be interpreted as a stock being overvalued, but it does not mean shares could not go higher.

Target Corp (TGT) is up by +1.38% in the pre-market after Gordon Haskett raised its rating to a BUY and its price target to $300. Just days ago, Edward Jones also elevated its rating to a BUY.  Dividend yield: 1.57%.  Potential average analyst price target upside: +21.4%. 

YESTERDAY’S MARKETS

Stocks rose yesterday with a late-day rally as investors appeared to digest recent, bearish Fed news. The S&P500 gained +0.43%, the Dow Jones Industrial Average rose by +0.25%, the Nasdaq Composite Index was higher by +0.06%, the Russell 2000 index declined by -0.35%, and the S&P500 ESG Index added +0.45%. Bonds slipped and 10-year Treasury Note yields added +6 basis points to 2.65%. Cryptos slid by -0.4% and Bitcoin gave up -0.70%.

NXT UP

• Next week: we will get Consumer Price Index, Producer Price Index, Retail Sales, University of Michigan Sentiment, Empire Manufacturing, and Industrial Production.  Please check in on Monday for calendars and details.