Time for a New Tune on Wall Street?

The song remained the same on Wall Street with a disconcerting level of COVID-19 cases and deaths combined with dysfunctional drama in D.C., somewhat offset by promising vaccine development announcements.

The market experienced roller coaster daily swings that left the market slightly lower for the fourth week in a row, with the S&P 500 down -0.6%. Over the course of this September sell-off the market has declined -6.47%, essentially erasing the August gains. Volatility, as measured by the VIX, has remained more or less constant at a modestly elevated level. It was a much worse sledding for small stocks as the Russell 2000 dropped -4.03%, and even tougher for the traditional value sectors as Oil & Gas stocks sank -8.35%, Basic Materials -5.68%, and Financials -3.46%. Also consistent with the “risk-off” tone, the dollar was strong, gold suffered its worst decline in months, and the yield on the Ten-Year Treasury drifted down 3 basis points to 0.66%. Wall Street economists have been sharply lowering their forecasts for fourth-quarter GDP growth as hopes have abated of an economic rebound driven by either additional stimulus or improved COVID-19 cases.

The weekly decline was cut in half by a nice rally on Friday afternoon which was sparked by the hope that the recent downturn might trigger a stimulus compromise. Tech stocks were the star performers advancing 2.56% for the week, as once again these mega cap companies trading at huge premiums to their normal P/E multiples were embraced as safe investments. Whereas these are terrific companies, we believe some caution is warranted. In the past, disregarding valuation in making investment decisions has led to subpar long-term returns. As Mark Twain said, “history doesn’t repeat itself, but it does rhyme”. We continue to favor high quality companies trading at reasonable multiples, with a particular emphasis on dividend payers and small caps. Additionally, we think the long-term risk of higher interest and inflation is being underestimated, and as such would add to gold on this dip and prefer TIPS (Treasury Inflation Protected Securities) to other bonds.

Time for a New Tune?

How can we avoid repeating the same song? The trend of COVID-19 cases and deaths could reverse (Hallelujah). All the branches of the Federal government could work together to provide a reasonable stimulus package, as well as beginning to address the myriad of critical issues facing the country (Do You Believe in Miracles). There could be a vaccine or therapeutic development surprise (Hit Me With Your Best Shot).

Unfortunately, it is more likely that the song will still remain the same. Politics will become an even more dominant verse, with the first presidential debate being held on Tuesday in Cleveland. The most important economic release will come on Friday when The Bureau of Labor Statistics will release the jobs report for September, with the consensus calling for the headline unemployment rate dropping down to 8.2% from 8.4%. Additionally, the Consumer Confidence Index for September is expected to show a rebound to 90 from a soft reading of 84.8 in August. We think the level of consumer confidence could be particularly important both for the economy and the election.

Stocks on the Move:

PRTS -11.8%: CarParts.com Inc is an online provider of automotive aftermarket parts and repair information. The company principally sells its products to individual consumers through its network of websites and online marketplaces. The company’s products consist of collision parts serving the body repair market, engine parts to serve the replacement parts market, and performance parts and accessories. There was no significant company news this week. PRTS is a 6.27% holding in the North Star Micro Cap Fund and a 2.42% holding in the North Star Opportunity Fund.

OESX -12.8%: Orion Energy Systems Inc is a developer, manufacturer, and seller of lighting and energy management systems. The company serves energy service companies, electrical contractors, national accounts, and electrical distributors. This week, the company announced the upcoming retirement of CFO William Hull. OESX is a 5.72% holding in the North Star Micro Cap Fund and a 5.36% holding in the North Star Opportunity Fund.

LYTS -12.5%: LSI Industries Inc provides corporate visual image solutions to the petroleum and convenience store industry. The company’s operating segments includes Lighting and Graphics. Lighting Segment manufactures and markets outdoor and indoor lighting and lighting controls for the commercial, industrial and multi-site retail markets including the petroleum/convenience store, quick-service, and automotive markets. The Graphics Segment manufactures and sells exterior and interior visual image elements related to signage and graphics, including integrated digital signage solutions and menu boards. There was no significant company news this week.  LYTS is a 1.82% holding in the North Star Dividend Fund.

SCS -21.5%: Steelcase Inc is a furniture company primarily based in the United States and has operations in Europe, the Middle East, and Africa. Steelcase markets its products primarily through a network of independent and company-owned dealers. The company operates through the Americas segment, the EMEA segment and the Other category. The Americas segment offers architecture, furniture and technology products is marketed to corporate, government, healthcare, education, and retail customers, EMEA segment provides furniture systems, storage and seating solutions. This week, the company released Q2FY2021 results that beat on estimates; however, the company’s sales were down 18% and management suggested declines may continue into Q3. SCS is a 1.49% holding in the North Star Dividend Fund.

ALSK -14.4%: Alaska Communications Systems Group Inc is a US-based fiber broadband and managed information technology services provider. The company is focused primarily on business and wholesale customers in and out of Alaska. It provides local, long-distance, and wireless telephone services, Internet access, and data services to residential and business customers. There was no significant company news this week.  ALSK is a 1.08% holding in the North Star Micro Cap Fund.

ETH -10.7%: Ethan Allen Interiors Inc is a U.S.-based company that manufactures and retails home furnishings and accessories. The company’s activities are divided between its Wholesale unit that includes case goods, upholstered products, and home accents, and its Retail segment. The majority of revenue within Wholesale is generated by upholstered products, and the majority of revenue for the overall company is derived from the Retail segment. Geographically, most of the company’s revenue is produced in the U.S. There was no significant company news this week. ETH is a 1.31% holding in the North Star Micro Cap Fund.

KBAL -13.1%: Kimball International Inc operates in the furniture manufacturing business. The company consolidated its furniture business and manufactures office and hospitality furniture exclusively. The company’s core market areas include commercial, hospitality, healthcare, education, government, and finance. The firm’s furniture brand portfolio comprises of Kimball, National, and Kimball Hospitality. There was no significant company news this week.  KBAL is a 0.83% holding in the North Star Micro Cap Fund.

Related: The Major Market-Moving Themes for the Next 6 Weeks Will All Be at Play