This week, Tom Weary, CFA®️, goes over the latest figures on the job market and inflation before sharing updates from RFA holdings Target, J.M. Smucker, and Oracle.

Transcript

Welcome to the Weekly Market Update. Markets continue to be highly volatile as investors adjust to new interest rate environment and the possibility of slowing global economic growth due to COVID in China and the war in Ukraine. We continue to see signs of a strong yet slowing U.S. economy. We will take a look at the latest reading on the labor market as well as inflation. We also heard some interesting updates from a few of our companies this week, so let’s jump right in.

Recently the government reported an increase in nonfarm payrolls for May of 390,000, which continued a strong run of around 400,000 for over a year now. The unemployment rate held steady at 3.6%, as we see in this first chart, a near half century low. The JOLTS survey showed job openings of over 11 million, twice the number of job seekers, while initial and continuing jobless claims continued to run at very low levels. All of these statistics taken together point to a very strong labor market, which bodes well for the consumer. The latest readings on inflation are also running hot, with the May Consumer Price Index coming in at 8.6%, as we see in this second chart, the highest reading since 1981. Even stripping out the volatile food and energy sectors, Core CPI for May came in at 6.0%. The Fed is unlikely to slow their tightening program.

Target warned that earnings will take a short term hit as the retailer marks down unwanted items, cancels orders and takes aggressive steps to get rid of excess inventory. Target anticipates its operating margin rate for the fiscal second quarter will be around 2%. That’s lower than the outlook it gave less than three weeks ago when it recorded a wider fiscal first quarter earnings miss, which sent the stock down roughly 25% and it’s worst single day performance on Wall Street since 1987. But margins are projected to recover to 6% by the end of the year. The pandemic is still wreaking havoc with supply side issues, but Target CEO Brian Cornell is facing up to reality and taking swift actions. That is what we want to see in our companies. We also like to see dividend increases because that is real money in our pockets, and Target did not disappoint, hiking its dividend 20%. This is a real vote of confidence by the board, and we applaud the move.

J.M. Smucker, a holding in the Defensive portfolio, warned that the recent recall of some Jif peanut butter products would weigh on results, even as higher prices and continued demand for at home foods and coffee lifted the food makers’ quarterly sales. Overall for Smuckers fiscal fourth quarter, the company posted profit of $202 million, or $1.87 a share, compared with $147 million, or $1.35 a share, a year earlier. Analysts had expected earnings of $1.86 a share. The company’s U.S. retail consumer food segments posted a 5% drop in net sales due to the Jif recall. International and away from home net sales jumped 12% while segment profit surged 18%. The company’s U.S. pet foods business saw net sales rise 10%. Pet food profit rose 19% due to lower marketing spending and higher prices. The great companies always find ways of navigating crises.

Oracle, a holding in the Defensive portfolio, came through with better than expected results for the company’s fiscal fourth quarter ended May 31, and gave strong guidance for the next fiscal year. For the quarter, Oracle posted revenue of $11.8 billion, up 5%. That was up sharply from the $10.5 billion reported in the February quarter, and ahead of the company’s guidance, which called for 3% to 5% growth. The CEO noted that it was the company’s best organic growth quarter since 2011. Oracle earned $1.54 a share, ahead of its target range of $1.42 to $1.44 a share. Oracle said total cloud revenue was $2.9 billion, up 19%. The CEO said the company’s cloud business should grow more than 30% this fiscal year. Including Cerner, its upcoming acquisition in healthcare information technology, cloud revenue growth is expected to grow 47% to 50%. Investors reacted positively to the good news.

So, what does it all mean? The U.S. economy may be starting to cool off, which is exactly what the Federal Reserve wants to bring down inflation. Global economic growth is weakening with Europe impacted by the war in Ukraine and China trying to emerge from COVID lockdowns. Retailers are struggling to get the right type and amount of inventory on their shelves, causing short term pressure on margins. Consumers are shifting their purchases from goods to services, while also showing signs of lower confidence due to all the talk of a looming recession. We don’t know exactly how events will unfold in the coming months, but we do have confidence in our companies. So please, sit back, relax, have a great weekend, and joining us next time for the Weekly Market Update.

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