Friday Five: Don't Unfasten Your Seatbelt Yet
Stocks ended roughly flat year to date after a volatile first quarter, but more turbulence could be in the cards.
Jason Stipp: I'm Jason Stipp for Morningstar. Welcome to The Friday Five, Morningstar's take on five stories in the market this week. Joining me with The Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Jason.
Stipp: We put the first quarter in the books this week. It was a rocky quarter, but we ended up about the same place that we started the year. What happened during the quarter?
Glaser: It was a wild ride. If you remember in January, we saw some pretty big declines in stock markets across the world, particularly in China, where potentially some measures that were supposed to reduce volatility seemed to actually increase volatility. Worries about Chinese growth and worries about the Fed raising rates more after the first rate increase in December really made people have a lot of fears about global growth.
But a lot of these turned around as we got through the quarter, as the Chinese market stabilized, as the Fed and other central banks made it very clear they were going to continue to be relatively dovish through both words and actions. We also saw oil, which had fallen in the beginning part of the quarter, start to come up a little bit as some suppliers talked about the potential of a production freeze.
But I think it's good to point out that, even though we ended up about where we started on the quarter, it doesn't mean smooth sailing for the rest of the year. A lot of the underlying concerns that drove volatility in the beginning of the quarter are still with us. The Chinese economy is still a bit of a question mark, even if their markets have stabilized. I think we could still see the potential of bad news coming out of China over the course of the year.
When you look at the sectors that did really well in the quarter and that drove the overall market return, they are more defensive. You saw utilities having a really great quarter; you saw other defensive stocks doing very well, and that seems to be an indication that the market was saying, "Interest rates are going to be lower for longer." It really is almost a bet on what's happening with interest rates. Now, if we were to see a change in those interest rate expectations, I think we could see those turn around pretty quickly, and we could see some of that volatility return.
Stipp: Janet Yellen this week certainly seemed to double down on the "lower for longer." She spoke this week, and the market seemed to like what she had to say. What's your take?
Glaser: I think that plays into this thesis. When Janet Yellen gave a talk and said that, given what's happening in the global economy, given the uncertainty, it's justified to keep rates in the United States low. Even when the employment market is looking better, which we'll talk about in a bit, and even when inflation is showing some emerging signs of heating up a little bit, it makes sense for us to continue to have low rates.
We see this against the backdrop of their March meeting, where they cut back on the number of increases they think are possible in 2016 and sent some more accommodative signals there as well. You add in that speech, you add in what came out in the March statement, and I think the market is starting to absorb that the Fed is not going to move too quickly.
The question will be, will inflation remain tame enough for long enough for them to actually be able to do this? Or will they start seeing a pickup in core prices that will force them to act before they really want to?
Stipp: The Fed is looking at inflation as one of their mandates, but the other mandate, of course, is the employment market. We got employment data on Friday, and it showed that the job market is still humming along.
Glaser: We talk less about the job market and more about inflation, partially because the job market has been relatively stable and relatively strong. We saw that again with March numbers: 215,000 jobs added. That was slightly above expectations, and that comes after a very strong February jobs number. We saw wages tick up. Unemployment rate went up a little bit, but for good reasons. There were more people coming into the labor market, and that's why the labor force participation rate came up. So we continue to see jobs looking pretty strong and showing that the U.S. economy has been resilient through some of these concerns, and I think that does show that inflation is probably the key thing that the Fed is really looking at more than the labor market at this point.
Stipp: Another sign of a resilient economy is what consumers are doing. And if you look at Carnival's results, it seems to indicate that consumers are feeling OK.
Glaser: Carnival had a good quarter. It was better than expectations, as they are seeing consumers willing to go out on a vacation, and they also provided some pretty good guidance, saying that consumers are also confident enough to book in advance.
During the height of the recession, one of the things that a lot of travel companies saw was the booking window got very, very short. People were only willing to book a trip a month out or two months out, because they were concerned about their employment prospects and about the economy. And we saw again that people were willing to look out farther, and they have the confidence to do that. It's a good sign for the economy, and it's a good sign for Carnival.
Over time, we think there are some things that are going to help Carnival out. They're expanding into China--it's a new market for them, and something we think is going to do well over the long term. They have some new fare optimization, some revenue optimization software that's rolling out. That's had some good results so far. Also they are getting some savings from procurement that should help them over time.
We do see the shares as slightly undervalued right now. They ran up on these results and are not quite as undervalued as they were, but certainly it's a company to keep on the radar screen.
Stipp: Lastly, spice maker McCormick, which has a wide economic moat rating, doesn't normally make headlines, but they did this week.
Glaser: McCormick is the kind of company that maybe by design is very quiet. You tend to see relatively modest but steady growth, and we actually saw some good results from them in this quarter. They were able to boost core sales almost 4%. That really was driven by volume growth, which is something that's good for them. They're showing that their competitive advantage is still very much in place, and they're not losing out to some of the private-label brands.
And we also saw them raise their bid for the UK packaged goods company Premier Foods. They had a first bid that was completely rejected. This bid was also rejected, but Premier Foods said that they were willing to speak with them and maybe see if they can get their price up a little bit more.
Erin Lash, who covers McCormick for us, points out that they've really been good stewards of capital over time, and there isn't a sign that they're probably going to chase this to the moon. But they think if they can get it for a good price, it could be something that would be accretive to McCormick shareholders over the long term.
Unfortunately, McCormick shares are, as Erin puts it, a little bit spicy right now. They're probably not a great purchase at the moment, but this is the kind of company that, if ever it did start trading for even a modest discount to its fair value estimate, could be an interesting long-term holding.
Stipp: Great insights on the news of the week, as always, Jeremy. Thanks for joining me.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.
Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.