Clorox’s expected sales are soiled after data breech infected operations

Stocks rallied yesterday as bond yields took a time out from their epic rise. A private monthly employment figure came in soft yesterday providing the Fed some hope that its doomsday wishes may be nigh.

Wallflowers winning. Who doesn’t like talking about stocks? Most random folks on the street have a prepackaged response to any question about the stock market. “Ma’am, can you give me some thoughts on the stock market?” “My husband always told me that Exxon is a sure bet, and he was right, God rest his soul… that oil just keeps going up… and those dividends.” “How about you, Sir?” “I love Tesla and that Elon Musk is a genius, I know a guy who bought it when it was like $2 a share and now the company is earning billions of dollars… I know another company just like it, but I forgot the name, give me a second while I search my TikTok…” The fact is, it is fun to talk about stocks, because all of them have a story of some kind. Better yet, you can actually make some money by owning them, that is, if you are careful and you do your homework.

Widening our view from random street interviews, the S&P500 has earned around +11.9% since the late 1950s… up until 2022. In recent history, we have seen the index have some tough moments, namely 2008, late 2018, and 2020, but the market always seems to roar back in epic fashion. By late 2021, surely every shoeshine boy, barista, gardener, and middle school student had a stock tip along with an exotic options strategy for you… and a portfolio to go along with it. Then the tide came in and washed away all those delicate and elaborate sandcastles. This threw everything into sharp focus as the selling in not just stocks but also bonds was relentless. No bounces to be spoken of, just selling.

Let’s talk about bonds for a moment. There really isn’t much of a story to tell when it comes to them. A government, municipality, or a company borrows money from you and in exchange, they pay you a coupon until the loan matures at which time, they give you your money back. Assuming the issuer stays in business and keeps making its payments, there is very little to discuss until the bond matures. Boring, yes, but very handy when constructing a diversified portfolio and for long-term planning. But why tie your money up for, say, 10 years in something boring that doesn't even yield as much as the stock market? Good question, right?

Well, there are lots of ways to answer that question. Let’s give it a go and start with bonds. Up until last 2022, yields were paltry, even on the riskiest bonds. Let’s focus on the 10-year Treasury note which was yielding less than 2% in 2020 through 2022. So, your investment in those bonds was generating less than 2%. When looking at stocks, analysts like to look at current earnings yield as a proxy of return on your investment. That is calculated by taking the stocks trailing 12-month EPS and dividing it by the stock’s current price and multiplying it by 100. Trust me on this , I confirmed it on TikTok . If we apply this equation to the S&P500, we would have found it bouncing around 5% from 2018 through 2022. Now, bear in mind that the figure jumped around a bit during that time as stock prices have been volatile and price is in the denominator of the equation… please just trust me on the math. In any case, the message here is that stocks, using this methodology, the most common one, have been, for the most part, head and shoulders above those of bonds, in yield, for the past 20 years or so. That is probably why most investors chose stocks over bonds, not to mention the potential principal gains, dividend yields, and of, course, the great stories. Makes sense, right? But something has changed recently.

I am sure that you have noticed that bond yields have gone up quite a bit recently. Looking at the 10-year note, which now yields 4.72% with no principal risk, we may wonder how that compares to the obviously risky stock market. If we use that equation from up above, we will find that the S&P500 has a current earnings yield of 4.78%. If you are still with me, you are probably noticing how there is only a +0.04% pick up for going into stocks from Treasury bonds. Riskless to risky for just another +4 basis points? Let’s reverse the question from up above. Why would someone invest in stocks over bonds if there is little or no risk premium? Granted, stocks have good stories, but either yields are going to have to come down, or earnings are going to have to increase, if we want to get a meaningful move in stocks. Of course, all this assumes that investors are rational and will always pick the investment with the greatest risk-adjusted returns.

WHAT’S HAPPENING IN THE PREMARKET

The Clorox Co (CLX) shares are lower by -4.42% in the premarket after the company announced that its net sales dropped by -23% to -28% in the quarter that just ended. The company was recently hit by a cyber-attack which disrupted its production, and the company notes that the breach is still having a material effect on its operations. Dividend yield: 3.64%. Potential average analyst target upside: +9.0%.

Parker-Hannifin Corp (PH) shares are higher by +1.41% in the premarket after the BofA upgraded the stock to BUY from NEUTRAL and raised its price target to $475 from $435. The company’s cash flow yield of 5.3% is higher than the median 2.7% of its peers. Dividend yield: 1.53%. Potential average analyst target upside: +16.0%.

YESTERDAY’S MARKETS

NEXT UP

• Initial Jobless Claims (September 30) is expected to come in at 210k, higher than last week’s 204k claims.
• Fed speakers today: Mester, Kashkari, Barkin, Daly, and Barr.
• Levi Strauss will announce earnings after the closing bell.