Source: Morning Star —
Susan Dziubinski: I am Susan Dziubinski with Morningstar. Every Monday morning I sit down with Morningstar chief U.S. market strategist Dave Sekera to discuss one thing that’s on his radar this week, one new piece of Morningstar research, and a few stock picks or pans for the week ahead. First let’s talk about what’s on your radar this week, Dave. With earnings season winding down, it’s kind of a quiet week this week, right?
Dave Sekera: Good morning, Susan. Good to see you. We finally get the chance here to catch our breath, I think for a couple of days. On the earnings front, I’d say probably the most noteworthy is going to be Oracle ORCL. We rate Oracle 2 stars. That reports here on Thursday. Then on the economic front, looks like Federal Reserve Chair Powell does testify to the Joint Economic Committee on Tuesday and Wednesday. Personally, I doubt he’ll say anything new, so I doubt there’ll be really much new news coming out of that. Really, the big item up this week is going to be on Friday, and I think the market’s going to be very closely watching the payrolls number.
If you remember, there was a huge surprise last month. The number was over half a million gain. This month, the consensus is looking for 200,000 and I think the two takeaways are going to be there is if it’s much lower, then I think that takes some of the pressure off of the Fed as far as having to tighten monetary policy higher for longer. However, if it is greater than the consensus number, then I do think that we could see some very volatile markets on Friday. In that case, then I think the market would assume that the Fed’s going to have to be more aggressive in tightening monetary policy.
Dziubinski: Let’s move on to some new research. Talk about your new stock market outlook for March, Dave, which just published on morningstar.com. After a strong start in January, stocks lost some ground in February. What are you expecting for March, Dave?
Sekera: Well, as you mentioned, earnings are for the most part behind us, and I think that means that the market’s going to shift its focus really much more to economic and inflationary indicators over the next two to two and a half months. Now on the economic side, we’re going to be looking to see if we can get a better sense as to just how long the strength in the economy is going to last before some weakness that we expect later this year. And really at the timing as far as when we could start seeing that economic slowdown. On the inflationary front, we want to determine whether or not inflation continues to keep moderating, which is our expectation, or if it could potentially remain persistently high. Inflation has been moderating, but I would say that we are still seeing some indications that it could be a little bit stickier than what we were expecting.
However, we still have the view it will moderate over the course of the year, and in fact, we think it’s going to moderate more quickly than what the market consensus is. We expect by the end of the year that in December, that year-over-year growth rate inflation will drop down to about a 2% rate. The economy has been stronger than originally anticipated, but again, we do think that tightening monetary policy will take its toll. But now we think that that slowdown for the economy’s probably going to occur more in the third and fourth quarter. Originally this year we thought it was going to be in the second and third.
Dziubinski: How do we look valuation wise from the overall stock market heading into the beginning of March?
Sekera: According to our valuations of those over 700 some stocks that we cover that trade on the US exchanges, the market right now is at about a 12% discount to our fair value. And I do think that’s a pretty attractive discount for long-term investors. But I do still caution investors are going to need the wherewithal to ride out some potentially tough markets, maybe some rough road here in the near term over the next couple of months. Again, we’re looking for when leading economic indicators this year start turning upward when we really think that we’re going to start seeing smoother roads ahead. When we break that valuation down into the Morningstar Style Box, we still think that probably some of the best positioning is going to be a barbell portfolio. Again, that’s overweight value, overweight growth; those two categories are trading at 15% and 16% discounts, respectively. And then I would recommend an underweight in core stocks. Those are trading much closer to fair value. And then I also note that we still see a lot of value in those small-cap stocks. Those are trading at about a 25% discount.
