Market Wisdom From Monty Python

Equities start the day flat and I think it’s time to revisit a movie classic so I can make a point. In April of 1975 Monty Python’s Holy Grail debuted to little fanfare but as time passed and its comedy aged like a fine Bordeaux it would end up on many “Greatest Comedy of All Time” lists. John Cleese, Graham Chapman, Terry Gilliam, Michael Palin, just a who’s who of funny Brits. It was a movie that heavily satirized Arthurian legend and included such classic scenes as a bunny wreaking havoc on a group of adventurers and a Knight who never quits. In one of funniest parts an undertaker is moving from dirt hovel to dirt hovel telling people to “bring out your dead” . A guy slings what must be his father over his shoulder and tries to dump him on the pile all while the poor gentlemen protests his fate. “I’m not dead yet…I feel fine….I feel happy.” You know what this poor beleaguered soul reminds me of? The US Economy. We keep trying to dump this expansion on the death cart of history all while it silently murmurs “I’m not dead, stop it”. Q2 GDP, as measured by the Atlanta Fed’s GDP Now debuted around 1.5%, fell below 1%, and we were practically burying it in a mausoleum. How often have people called for the end of not only the economy but of the stock market? Is it 50? 100? Ironically, after a slew of decent economic data last week, GDP Now ticked up to 2.1%. That’s right, exactly where we’ve been for years. I’m sure you’ve heard the term “muddle thru” but it has been, as always will be, the best description of the post Financial Crisis period. Economic growth keeps muddling thru (as Perma Bears lead people astray) and that’s been enough for the stock market to have one of its best runs in history. At the end of the scene they club the poor guy in the head and drop him on the pile finally ending his protestations. Will that club be Tariffs? A Trade War? A policy mistake? A good ole fashioned economic slowdown? None of us know but for now we’re not dead yet.

Wow that first paragraph ended up a bit long didn’t it? Luckily absolutely nothing happened today. Since there’s a Fed meeting on Wednesday, and the Fed is all the rage nowadays, the market went nowhere on no volume (about 20% below a 30 day avg…yikes). Hey, dear reader, Vanguard had a really cool study on “How America Saves” that’s worth your time (its long though). I liked this graphic which shows the % of allocations to equities by age. I’m heartened by the fact that this number has consistently risen for those under age 30, in fact I wrote a piece to my millennial friends urging them to do something similar (you can read it here). You’re doing great guys, I’m excited to see what you can accomplish, just know that your boy Mike is here to help out whenever you need something answered like “why does Wall St have to use so many complicated terms” or “why do people eat bone in wings when boneless is so much better” or “what finance book should I read as a 25yr old” (this one). I got your back, like and subscribe!

So yea, the death of the economy and the bull market have been greatly exaggerated for years now. Let’s have @StrategasRP weigh in here with one of their wonderful charts from today (thanks Jason and Ryan). Here is their Bull Market Top Checklist and if I’m reading this thing right (I’d like to think I am) then the real trouble looks to be a ways off. Frankly I’d love it if people keep calling top and worrying about the death of our economy, we want that Wall of Worry to be a mile high. In fact some argue that an end to the Trade War would be a “sell the news event” because it chips away a huge brick in it. Anyway, everyone is waiting for the Fed on Wednesday so don’t expect much action until then. Relax, have a cream soda (can you name the movie?)

News Highlights:

“Fly Me to the Moon” was the first song I danced to with my wife so it holds a special place in my heart. This hip hop version not only modernizes it but reminds me how timeless the song truly is

(how awesome was that first dance with your spouse? What an incredible memory) (you need to be able to hear this)

Have a great night

No Rulebook

Equities start the day higher as the game remains really, really hard. Not as hard as running a Soviet built RBMK nuclear reactor but still pretty darn hard. As of this morning the S&P500 sat about 2.5% below its all time high but the past few weeks have exposed us to way more than 3.6 roentgens. Slowing economic growth, rising bond yields, trade wars, fresh tariffs with Mexico, weakening technicals, all of which combined cracked the market for a 7% correction. Which hurt, a lot, especially since it looked like we put in a triple top. I’ll admit that over the past few weeks I’ve felt weak in the knees about not only the state of the economy but also of the market, failures at the high will do that to someone. However, and this is not only important but easy to forget, the Federal Reserve can dump BUCKETLOADS of sand and Boron on a market fire. If there’s one thing we’ve learned over the past decade it’s that the market loves a friendly Fed so as the odds of a rate CUT skyrocketed so did equities. Now a great many strategists and pundits will point out that the Fed cutting rates at this point in the cycle is not what we want to see and, using the past as a guide, they are right.  Cutting rates is meant to fight off weakness in the economy not to make stocks go up, in essence this is their primary weapon against the forces of evil. But I think we’ve reached a point in history where rulebooks have been thrown out, in fact “extraordinary interest rate policy” would be a prime example of that. Legasov and Shcherbina weren’t following any kind of roadmap as they fought to contain the fallout from Chernobyl, they did everything they could to save their homeland. They sent men (heroes really) to certain death because they had no other choice. I think the Fed is in a similar predicament i.e what they are witnessing is like nothing anyone has seen before. There’s no manual for helping to contain the damage from a Financial Catastrophe, a Trade War, or tariff driven policy so if they have to cut rates to soften the damage so be it. Should they wait to use that weapon until it’s too late or should they deploy it early? Only history will tell us what the right choice was.-

Couple of stories worth mentioning today. We saw two big deals with UTX and RTN agreeing to merge and CRM bidding $15B for DATA. Yep, that’s right, there’s so much economic uncertainty and global growth fears that we saw two multi-billion dollar deals announced today (/sarcasm off). What else? Beyond Meat has gone to infinity and beyond racking up gains of 256% since its opening print. What’s that? It’s worth $9.8B making it bigger than 80 S&P 500 companies all on 2019 estimated revenues of $221mm? Ahhh stock markets, I love you crazy kids. We saw a nice rally this morning taking us well past 2,900 but by lunch half of those gains had evaporated. Why? No news to speak of so it’s likely we just ran out of excited buyers. Remember: emotional money trades in the morning, the more thoughtful and analytic in the afternoon.     

SPX closed at 2,886, up 0.45%, as we continue to grapple with all sorts of moving parts. Here’s something I want you to remember: I write this blog to both educate and entertain you but the fact remains that investing is really hard. We can create narratives to help ourselves sleep better at night but ultimately stocks can and will do all sorts of crazy things. What’s crucially important is how you act during difficult times. Your behavior when the market goes wild will largely determine how successful you’ll be at this. Think of everyone who cut and run at the end of last year, how hard it must be to get back on track. If you can absorb this one lesson, which boils down to not sabotaging yourself over long periods of time, then you will have learned one of the great secrets to success.  You don’t have to be right all the time, you just need to be a little less wrong.

News Highlights:

So we’re somewhat close to Father’s Day and in the spirit of that fine, fine occasion let’s look at a Dad in the wild exhibiting his “Dad reflexes” (which are known to be legendary)

Have a good night

Allow Me To Rant

Equities start the day higher as bonds continue to lead us around by the nose. Do you mind if I rant here? I need to go on a market related tirade and you guys are the only people who will listen to me. My family doesn’t care, my co workers are tired of me, and Twitter only wants to see memes. Is that a yes? Great. Let’s break this down. Right now the equity market is literally trading in lockstep to what yields are doing. Yields fall, stocks fall, yields rise, stocks rise. The big bad bond market must be telling us something so if they’re worried we should be worried and then just puke up stocks. Hey, have you ever seen this formula? Maybe you have and you forgot it (like everyone else on the planet) but that’s the formula for the present value of future cash flows. If we can agree that the stock market is a giant discounting mechanism for future cash flows then if that little “i” in the denominator (which represents interest rates) falls then the present value is worth….that’s right…more. So am I supposed to be rooting for interest rates to go UP so the denominator can get bigger? Did I sleep thru fractions? Ok, yes, I know the move is more about slowbalization, monetary policy, and inflation expectations so don’t @ me trying to ruin this rant. Whatever, fine, we want rates to go up so stocks can stop worrying about slowing growth then someone dial up Beijing and tell them to dump their Treasuries. Better yet get Jerome on line 1 and tell him to start puking up that $3.8T balance sheet, that’ll get rates higher and then we can all love stocks again. Hey, anyone remember when we were spooked by RISING interest rates in late 2018? Fun times.

Most of today was spent obsessing over “rare earth metals” and whether or not “yield curve inversion” means anything which led me to make this tweet. I bet a fair number of Americans know about the Trade War but the rest of them I’m not so sure. I think as we obsess over economic data and interest rates we lose sight of the fact that the average American just doesn’t care about any of this stuff. They care about their family and friends, their jobs, and the things that make them happy. That’s actually refreshing right?  Anyway, stocks went nowhere today and as of now we sit roughly 5% below the all time high. If we wanted to keep it real for a second 5% selloffs happen all the time, in fact in any given year we see up to three 5% drawdowns. Will this one get worse? Is the top in? If I had those answers I’d be running a family office so I will say this: Only time will tell so stay tuned to all the market content we provide here at Baird because its unmatched on the street!! (@williedelwiche/@strategasRP)

Let’s wrap up this goat rodeo and head home shall we? I felt like I needed to rant earlier because I love bloviating about the irony inherent to what moves stock markets. I know that it’s the direction / velocity of rates that matters more than the level so I’m not being purposefully obtuse. I just find it funny that we worried about rates >3% and now we’re worried as they approach 2%. I guess it’s like the price of oil. Oil above $80 is bad and oil below $30 is bad. That being said the great @ukarlewitz points out that there might not be any signal at all from what rates are doing so *shrug*. I guess if I had to finish with a thought it would be this: rates are basically acting as a proxy for sentiment right now. We know that falling sentiment is bad for stocks until it gets to an extreme level then it turns good. So….will “low rates” become good for stocks? i.e. will TINA rear its head? (for those of you playing at home TINA means “there is no alternative”) I bet you’ll be hearing more about that soon!

News highlights: 

So I can’t explain any of this end video, I don’t get it, someone needs to walk me thru all this because it’s mind bendin

Have a good night

Is It Summer Yet?

Equities start the day slightly higher as Memorial Day weekend comes to an end. I hope you had a good long weekend, I sure did! Before I educate you on markets and why you should grille every single meal outside until October I wanted to pass on this wonderful tribute to the fallen from @billsweet. A very powerful reminder that freedom isn’t free. Anyway…is it summer now? Do we count Memorial Day as the start of summer? I don’t know, it was 55 in my town yesterday so it sure doesn’t feel like it here. That being said, it’s time to start consuming beach cocktails, listening to Yacht Rock, and cooking outside because summer FLIES by. If you aren’t filling your days and nights with smooooooooth music and icy cold drinks then you’re just doing it wrong. As for the market there’s really nothing new to talk about, I hope you’re prepared for endless parsing of trade commentary mixed with sentiment swinging back and forth. Here’s the official position of Baird’s investment strategy team led by Bruce Bittles and Willie Delwiche: “So where do we go from here? We still believe that a trade deal will be reached, although it may take many months. We suggest investors stay with the strongest S&P 500 sectors which include the defensive sectors of utilities, consumer staples and REITs along with communication services and consumer discretionary.”  By the way, when I said “sentiment swinging back and forth” I meant it. If these headlines don’t change (or end up taking months like Bruce and Willie said) we’re going to experience countless weeks where everyone is depressed followed by wild swings back towards optimism after a random tweet or a comment from Chinese official. Sigh. Headline markets are never fun, especially during slow summer months.

Price action this morning was largely forgettable, I guess everyone wanted to stretch that long weekend out. Volume was roughly 12% below a 20 day average and the market basically went nowhere. I have to say that things feel decidedly less rosy than they did even a month ago. Now I’m sure part of that is the fact that we’re about 4% off the highs (as my friend @hmeisler always says, price determines sentiment) but all the notes I read and blogs I consume feel like they’ve turned dour in their prognostication. If the Trade War slogs on and treasury yields continue to puke and PMI’s keep falling…well…I guess there really isn’t a lot to get excited about. Man, if I had written a “Sell in May” blog I’d be retweeting it every 13 seconds right now. Hey, dear reader, are you watching this #Chernobyl on @HBO? If you aren’t I’m gonna get really mad. Not only is it the highest rated Mini Series of all time (I’d argue that still belongs to Band of Brothers) it’s also blowing my mind. Did you know there was a 36 hour stretch where, if things went a certain way, about 50 million people would’ve died and most of Eastern Europe (and parts of Western) would’ve been rendered uninhabitable? It’s a sobering look at what was probably the most dangerous time for Europe outside of World Wars.

After lunch the market finally gave up its wanderlust and promptly fell on its face. Down 0.85% as “growth worries” spread its malediction thru our corruptible veins. I think at this point “muddle thru” is shaping up to be the best case scenario for both the economy and the market. With bond yields dropping faster than Game of Thrones podcasts we’re now faced with the sobering fact that the market has priced out an upside surprise to growth. Not only that, the odds of a rate cut in December (which would be troubling at this point in the cycle) have breached 80%. Macro seems sketchy, technicals are weakening and buy the dippers seem to have vanished. Sheesh, this market can be sweet but a psycho.  

News Highlights:

We’ll end tonight with one of the craziest traditions I’ve ever seen. Chasing a cheese wheel down a hill in Gloucestershire (a name I literally cannot pronounce. But that’s from a guy who used to call Leicester Square “lie-chester square” so whatever, I suck) 

(God I love England) 

Have a good night

No Man's Land

Equities start the day higher as we continue to explore no man’s land. We’re just kinda stuck in an area between “things are getting a lot better” and “things are rapidly deteriorating”. Given the lack of fresh news we’re supernaturally focused on this “Trade War” thing (is supernaturally the right word there? Probably not. Whatever, I like it and I don’t have an editor). The problem with being this myopic is that we will consistently overreact to every single perceived change in tone. Huawei, a company that 99% of American’s don’t even know exists, has suddenly become the thermometer for how things are going. Are they banned from the United States?  Sell stocks. Is the ban temporarily lifted? Buy stocks. What a joke. I said it in my last blog but economic tension between China and the US is probably the new normal (unless a market event changes that). That being said, can we briefly circle back on another topic? Earnings for Q1 actually beat, in fact they grew nearly 2%, and LPL points out that full year estimates are actually back on the rise. Now could tariffs change their course? Absolutely, and it’ll be imperative to read conference calls in Q2 to see what companies are doing to prepare for them. But you know what? Even in this time of heightened trade tensions there are companies out there executing on their business plans to the best of their abilities. All of the following are within 2% of a new 52wk high: CMG, LULU, V, PYPL, MCD, COST, and PEP. I could keep going but what I’m trying to say is this: doom and gloom about China / US relations isn’t going anywhere anytime soon but neither is the insatiable desire by U.S companies to succeed regardless of the macro environment.   

We spent most of the morning trading higher because, like I’ve said in the past, markets trade on “better or worse” in the short run and the Huawei news was accepted as being slightly positive (though this story strikes me as being slightly negative so *shrug*). I actually feel bad for my business journalist friends right now. When the market is down they have to write “stocks are concerned about an escalation in the Trade War” yet when the market is up they write “stocks gained as fears of a worsening Trade War eased” and often times those two headlines are on BACK TO BACK days. Brutal. Maybe we should all stop obsessing over day to day headlines? Is that too much to ask? Hey, I have a question for you, has there ever been a single person who heard the sound of their own voice and said “oh yea, I love how I sound.” No right? Why do we all hate our voice so much? This really bothers me as I debate launching a podcast for Baird. Anyway, by lunch we trading up around 0.8% led by Materials, Tech, and Energy.

We saw a small selloff late in the session and a close at 2,864 +0.85%. So I asked my esteemed colleague Willie Delwiche what he’s looking at right now for a couple of reasons. 1) He’s a heck of a technician and 2) He tends to look at different things from me so hey, teamwork. First and foremost he pointed out the Valueline Geometric index which basically represents the median stock price in universe of roughly 1,700 names. It’s at its lowest level since January so more damage is being done under the surface than we might think if we only looked at SPX. Second, he pointed out the weakness in Semiconductors which is a pretty good leading indicator. Finally, he noted that breadth has really lagged in the S&P over the past few months and if that continues to deteriorate it might be troublesome for the bigger picture. Now he doesn’t strike me as outright bearish but one of the things I like about him is that he’s always on the lookout for things people might miss which could point to a broader weakening in the tape. I guess we’ll see how things evolve over the next few months but one thing’s for sure, trade tensions are not getting better so let’s see how the market adapts to that.         

News Highlights:

Tonight we’ll end with People being awesome! I love people, especially you because you invite me into your inbox and let me rant about markets / show you educational links and funny videos. I love you so much  *SOBS*

Have a good night