VIDEO: Can the Stock Rebound Last?

Video - March 30 (12:32)

In today’s Portfolio video, Chris Versace walks through why stocks are rebounding and discusses whether this move has staying power.

He also reviews Federal Reserve Chair Powell’s Monday morning comments on inflation and private credit and share what we’re watching when it comes to inflation prospects and rate cuts. Meanwhile, escalating Middle East tensions and the lack of a near-term resolution keep uncertainty elevated as we head into earnings season.

Chris also lays out the steps we’ll take to reconstitute the EPS Diplomats basket on Tuesday and Wednesday morning, and how we’re thinking about the Portfolio’s cash levels as we do so. He also discusses Microsoft’s (MSFT) AI announcement and TJX’s (TJX) new dividend increase.

More Pro Portfolio

At the time of publication, TheStreet Pro Portfolio was long MSFT and TJX.

Transcript

CHRIS VERSACE: Hey, everyone, Chris Versace here. It is Monday, March 30, almost the end of the quarter. But as you've probably noticed, the market-- it's moving a little bit higher today, not exactly a major surprise as we talked about earlier today, given the fact that, Friday, the S&P 500 was in oversold territory, based on its relative strength index level below 30.

But the question, as always, is, is this going to be a short lived phenomena, caution warranted? Or is this something that could perhaps have a little more legs with the market moving higher? Now, as we think about this, a couple things, helping lift the market today. Yeah, some comments from Fed Chair Powell. He spoke at that event at Harvard. And he said that Trump's sweeping tariffs resulted in a one-time price bump. And that the Central Bank-- little control over supply shocks, such as war-driven surge in oil prices.

Well, we know this. Candidly, Powell's comments not that different than what he said after the Fed's most recent policy decision in his presser. But from our perspective-- and we've talked about this quite a bit-- really, what we're concerned about is where our energy prices-- oil, gas, diesel, jet fuel and the like, and the subsequent follow-through on petrochemicals, fertilizers, and other things. Where are they likely to settle out when the US-Iran conflict is eventually over? Now, we don't know when it's going to be over.

We'll talk more about that in a second. But for us, the specter of inflation, area pressures, is tied relative to, where were these items and their prices January, February, compared to where they are now? Where are they likely to be in the second quarter and so on?

With that in mind, I will share that if we look at WTI crude per barrel around $103, up significantly, compared to the high $50s that it averaged in January, February. So we'll be watching. Where does it move over the coming weeks, relative to that $103 level? If it's higher than that high $50's level, that means we will see some inflationary pressures have to work its way through the system.

For us, it likely means that the odds of a Fed rate cut this year, which was already questionable coming into the year, a lot less likely. But we could see the market dance around that. But we'll continue to follow the data. And as I shared with you in our opening comments this morning, next week, once we're back from the Easter holiday, we will get a lot of March-facing data.

We'll get some later this week, including the employment report. But we'll get a lot more data next week, particularly on the services side of the economy. That will really tell us a lot more about the speed of the economy, inflationary pressures, and whether or not companies are starting to feel, let's just say, a little more concerned. Perhaps they're seeing what's unfolding in the marketplace and the US-Iran conflict.

And in the past, when we've seen things like this, we have seen companies slow things down, extend deal cycles. So that's something that we'll be listening for. Powell also shared in his comments today that the Fed is watching private credit super closely, almost a direct quote. And he said also, too, that the Fed currently doesn't see it as systemic risk. No signs of a contagion, in other words. Justice Powell said kind of a healthy correction, not too dissimilar to comments we got over the last few weeks from JP Morgan's Jamie Dimon and a few others.

So we are seeing the market kind of bounce a little bit today. But remember, the market is in what we like to call, what did I hear last? What headlines did I see most recently mode, reacting more to that than anything else. And as we think about that, a few minutes before I sat down to tape this, what did we see? Well, Iran called the US peace proposal unrealistic. And then, according to the reports, including ones from Reuters, they fired a wave of missiles at Israel.

So that doesn't sound like we're on the cusp of a peace deal. Although, we do understand that talks will be hopefully happening later this week in Pakistan. We will continue to follow the developments of the day. But again, near term solution isn't likely. And as we've discussed with you, the longer this goes on, the duration, the more we become concerned about the potential follow-through, not just for those energy prices and inflation, but what is the potential follow through when it comes to the upcoming quarterly earnings season, both for the current quarter.

Because let's face it, with the quarter closing tomorrow, the conflict and the issues that it has awoken will be with us for one third of the quarter. But the spillover, the follow-through is likely to be continuing where companies are likely to bake that into their guidance.

So we're going to be watching all this very carefully. And perhaps, it means we might have some decisions to make with the portfolio. I've said this before. But remember, this time around, we're also getting ready to reconstitute the EPS Diplomats basket.

And as we reconstitute it, a two-part process. First part begins tomorrow where we remove the positions that will no longer be in the basket. And on Wednesday, we will be bringing not only the new holdings into the basket. We will also be increasing the portfolio's overall exposure to the diplomat strategy to 4% of its assets. That's up from around 2% at the start of the current quarter.

Now, why are we doing this? We've talked about this a bit. But for newer folks, it bears repeating that the EPS Diplomat strategy focuses on the companies with the fastest level of earnings growth, with a consistent track record of delivering superior earnings growth.

That strategy outperformed the market when we first started it in the second half of the December quarter. And despite everything that has happened so far in the current quarter, it continues to outperform the S&P 500 as well. So for that reason, we are increasing the portfolio's exposure.

But as we're getting ready to do that, we will share with you that when we look at our cash position, it's a little over 8% And we realize that we're going to have to take down another couple points of that cash position to build up the portfolio's exposure to a starting point of 4% for the basket.

We might have some decisions to make. So there are a couple positions that are north of 4% in the portfolio, SuRo Capital really standing out on that front. But remember, we want to be positioned with companies with superior earnings growth prospects with very constructive tailwinds at their back, not necessarily companies that are-- how do I say it? Poised to be dead money, questions about earnings potential, technical issues, or technical hurdles that really make a big impediment to any upward progress on the shares, those types of factors.

So we want to make sure that we take a holistic approach about this. And we are putting a lot of pencil to paper and that sort of thing as we work through with this. The last thing we want is to continue to have a stock that could be dead money or something where it's just very restrained. So we'd rather, candidly, fish in more productive waters. And that's part of our decision to increase the portfolio's exposure to the EPS Diplomats.

Now, because the first part of this reconstitution is coming tomorrow, Tuesday, and the second part on Wednesday, it's fair to think that we're going to have a lot more to say about this. But I want to just hammer home to you that we're trying to make sure that as we make one move, if we need to make any others, we want to make sure that we make some smart moves, setting the position up for what's to come, continuing to focus on where capital is being spent and companies with better earnings prospects.

So that's all part of our thinking. And again, we'll have a lot more to say shortly. But real quick, I want to talk about two other things. One, Microsoft, we talked about, that we're closely watching that stock last week. But today, the company took the wraps off of what we'd call a new AI upgrade, unveiling its new multimodal deep research system-- Critique.

Critique-- what is it? Well, it allows people to use Copilot to access multiple AI models, rather than leveraging just one. Nice to have. Yeah, kind of sounds like something Apple talked about last week. And, look, letting customers choose, whether they're individual consumers or enterprise clients and letting them work with the AI models that they want to work with-- it sounds like a smart decision to us.

Access is really what it's granting over being locked into a model or a limited choice that they may not be working with. So we see that as a smart announcement. But remember, at its core, Microsoft-- it's really an Enterprise Cloud play. So I think this kind of fits in with that, letting the customers decide. Microsoft-- not really a consumer software company like it was 10, 20 years ago. But we've talked all about that.

And with that in mind, for us, the real catalyst we have to pay attention to is Microsoft making progress on monetizing the additional capacity and that massive backlog that it has as it normalizes its margins along the way. So that's what we're going to continue to track. I will say that given rising AI adoption and usage levels, we are interested in remaining shareholders of Microsoft because of its position with Azure.

So, second, TJX. We continue to think TJX is well positioned in this renewed inflationary environment, consumers continuing to look for ways to stretch their disposable spending dollars, feeling the pinch of higher prices, especially in the short term. Company came out. And it declared a $0.48 per share quarterly dividend, almost a 13% increase from the prior dividend.

Now, we've talked about how the company continues to see a wide open array of new locations for itself, increasing its footprint, not too distinct or different from Costco. And I will say that we continue to see that company benefiting. But, this, very supportive, very constructive for our 180 target, continue to like TJX shares.

And, folks, we are going to have a lot more to come. We will have a set of office hours this afternoon as well as one or two more things we want to share with you. It may be a shortened week with the market closed on Friday for the Easter holiday. But for us at the portfolio, business as usual. And that means making sure that we have our March monthly roundup in your hands ahead of the Easter holiday, so a lot of work to do.

But between now and getting that monthly roundup later this week, please be sure to check your emails and your alerts. We want to make sure you're getting our latest thoughts. And when we make some trades, because we know we're going to be reconstituting the EPS Diplomat's portfolio this week, we want to make sure you are right there with us. Thanks for watching.