The Best Month

There’s one immutable fact about our calendar: October is the best month. There is no argument here, don’t even try to email me about this take, it is the best month by far. The front half of it is usually warm, the back half is crisp, leaves are turning into spectacular colors, and it ends with the best holiday of the year (yea I said it.  Halloween). Apparently the stock market didn’t get the message though because holy cow what a mess. The first two days have seen the S&P500 fall roughly 3% which is the worst start to the month in over a decade. Does this mean we’re going to experience a repeat of last years disastrous drop into the Christmas Eve massacre? I doubt it, primarily because the Fed is easing not tightening. Last year was a toxic brew of a growth scare + Fed hikes and right now we only have half of that in our cauldron. On Monday I said that the stock market was holding its ground primarily because consumer data remains firm. Today we saw ISM Services whiff and you don’t have to be a CMT to notice the downtrend. This bears watching, it really does, if other consumer data like spending, jobs, and residential investment falters then it’s entirely possible that uncertainty around this Trade War has bled from businesses into consumers. Speaking of consumers, lemme give you my take on what “free commissions” might mean to our world.

The biggest news this week was that discount brokerages like E-Trade, Schwab, and TD Ameritrade were cutting their equity trading commission to 0. Free, no cost, you can wing yourself into and outta stocks online for absolutely nothing (startup Robinhood has allowed their customers to do this for a while now). Now there’s a case to be made that this is a golden age for retail investors, the frictional costs of investing for mom and pop are approaching 0. But here’s what the data shows about them:  most do-it-yourself investors struggle to match the overall performance of the stock market. Now there’s lots of reasons why but they mostly revolve around overreacting to noise, trying to time the market, and letting emotions sway decisions. They see something they think is important, fear and greed kicks in, they make a rash decision, and all of a sudden they are chasing the market around. Behavioral stuff. Now if there’s no transaction costs they might be MORE inclined to do this. In fact, I wonder how much “free commission” will end up costing retail investors?

Honestly, I think this will only increase the value of advice/having an advisor. A great many investors will STILL fail at reaching their goals even with zero frictional costs. They are only human, they have biases and emotions literally working 24/7 against their investing success. Yes, advisors charge fees, but part of their value lies in helping clients overcome those investing traps and tackling those behavioral biases which might get WORSE now. Remember, the value of advice is different than the value to transact, don’t conflate the two. Good advice, and frankly a good partner who understands you and your values, will always be needed even in a world of $0 transactions.  

Ok, apologies, I went a bit long today so I’m just going to skip to my big finish:

Tell me if you saw these guys performing this act on the street you wouldn’t give them at LEAST $20? Absolutely amazing

https://youtu.be/KY7YVUfx93s

Have a good night    

Uncertainty

One of my biggest pet peeves is the notion that markets will some day have “certainty.” I’d argue that “I’m waiting for clarity before making a decision” is actually the worst thing someone can say if they work/invest in the stock market. Awful, embarrassing to hear, people pay advisors and analysts to make tough decisions when things seem crazy because that’s the whole point. You will never have clarity, things will never settle down, uncertainty is and always will be present because if it wasn’t stocks would never move. As we end the month of September I want you to remember one thing about our current level of uncertainty: this market is 1st, 2nd, and last about global trade and monetary policy. It is not about politics or anything else, it’s about how the interconnected economies of the world are responding to a spat between two gigantic trading partners. If you’re a fan of watching intraday price action like I am you’ll notice that headlines regarding trade are still leading the market around by its nose.  When that changes I’ll let you know, but until then don’t confuse noisy headlines with what investors really cares about. 

So what do smart investors really care about other than trying to figure out how to get to this beach? They care about the fact that the U.S. economy continues to muddle thru driven by a consumer that remains somewhat resilient. Is manufacturing and business/CEO confidence weak? Absolutely, but what else would you expect from a global Trade War? The biggest risk remains some kind of policy error (Trade War spirals out of control, Fed doesn’t act, etc) that finally cracks that resiliency. That being said, the consumer is still consuming, they are still buying New Homes, they still have jobs, and their balance sheets are quite good. Recall that 70% of our economy is driven by YOU (sorry to my pals reading this abroad) so that’s what we’re watching for signs of weakness. Can anyone predict a recession by just watching consumer data? Of course not, no one can predict anything at all, but why do you think the market has remained so steadfast (I love that word) in the face of all this horrendous economic data? Also why are Pumpkin Spice Lattes so popular? They’re awful.

Lemme say one last thing about politics (how many people have ended their career saying that?). Politics is extremely noisy with almost no signal. The market cares about POLICIES not politics, that’s what we want to be thinking about.  Remember the rally in 2017/2018?  Happened on the back of de-regulation and a tax cut which boosted corporate earnings. To the extent that we might see fewer market friendly policies in the future that MIGHT have an impact on the investing landscape. MIGHT. Again, nothing is certain (other than October being the best month of the year), but that’s what stocks focus on. Look, I know it’s challenging to divorce your political views from your market forecasts but you absolutely must do so because strongly held beliefs can be toxic to investment returns. These are big complex entities we deal in, don’t make the mistake of over emphasizing the wrong things, headline related volatility and uncertainty will always be a part of this world.   

News Headlines:

Oh man I love this video so much, there’s nothing better than seeing the joy of youth.  It makes me laugh and smile at the same time, make sure you have sound!! (the kid on the 50 cracks me up)

https://youtu.be/fl3pL8Y364o

Have a good night

The Boxer

Equities start the day higher as…whoa boy….so much is happening. Last week was absolutely goat rodeo bonkers insane as tweets came flying in from all directions whipping the market around like a 6-year-old on a Tilt a Whirl. It is impossible to handicap what the market is thinking given how fast the narrative is changing. Futures were down last night because the United States ratcheted up tariffs on China yet when I walked in the door futures were up because of a tweet. Ok, I mean is it too much to ask for all of this not to happen live on Twitter.com (if you aren’t on TWTR I don’t even know what to say anymore). Let’s put all of that aside for a moment and try to ground ourselves in a few facts. Last week saw all of the following: Initial Jobless Claims fall (still near cycle lows), New Home Sales print a new cycle high (after June was revised), $TGT release incredible consumer based earnings (might I remind you their stores are within 10 miles of 80% of Americans), and Leading Indicators print a new cycle high. There’s still good news to be had here, it’s not all doom and gloom, LEIs and New Home Sales peak well before a recession begins and they just printed new cycle highs. However, think of our economy as a boxer, it can take a lot of punishment until it can’t anymore. The biggest threat to the expansion is a policy mistake, i.e. things just go a little too far with the Trade War and consumer/business confidence, which is as fragile as my ego, shatters. We don’t know which punch will knock the boxer down but we do know that less punches would help keep us on our feet.

All things considered it was a fairly quiet day as the market basically went sideways from the open. Luckily for us that sideways was in green territory led by Tech, Staples, and Financials. Headline Durable Goods beat expectations as did Dallas Fed and if you were to wander over to the Citigroup Economic Surprise Index you’d notice its had a heck of a run lately (economic data is beating expectations). That being said August has been CRAZY because Tariff and Trade War madness is leading us around like we’re on a leash. Winners:  FTI, DISH, HAS, DE, UPS, and AMGN. Losers PM, LB, GPS, ADS, and DD. There’s no way this works right? Also how often are you using a ladder on flat pavement with tons of room in both directions? I’m short this thing.

We closed on the highs of the session, 2,878, up 1.1% so at least there’s that! To be honest if I had to put a reason on the market rallying today it would be 1) we were due for a bounce after Fridays drubbing and 2) there were no new tweets? Here’s the thing, I think the entire World agrees that trade with China needs to be addressed, it really boils down to “how” we address it, that’s what has the market spooked. The US economy has weathered a great many storms over its existence and you could argue it is STILL weathering the current one. The real question is how long the winds of trade blow and what their final tally will be. Only history will tell us but know that we’re diligently watching the anemometer here at Baird (never in a million years did I think I could work that word into a recap. BOOM). 

Final Score:  Dow +1%, S&P500 +1.1%, Nasdaq +1.3%, Rusk +1.1% 

Tonight I wanted to end on something that made me smile or laugh. This kid right here, makes me smile. Get after it little man!!

https://i.imgur.com/zpv7mVz.gifv

Have a good night

Preparation Matters

There might not be anyplace I hate more than the dentist. Actually, hate isn’t the right word, it’s probably “fear”. The soulless waiting room, the bright lights, the whirring sound of a drill, the scraping sound of a metal pick, it’s a misery symphony composed of pain and regret. We should all be going twice a year but given my propensity to avoid things I fear, I’m not even close to that schedule. When I do go I vigorously brush and floss the week before as if that’s going to save me from a hygienist picking thru my gums like a ravenous eater scraping lobster meat from a shell. You know what would help me avoid all this fear and pain? Preparation. Not waiting until it’s too late before soaking my mouth in burning Listerine and brushing my molars like I’m cleaning shower tile. There’s a lesson to be learned from my fear of the dentist and it has to do with your approach to living thru a recession.

There have been 11 post WWII recessions in the United States that have lasted, on average, 11 months (nice symmetry huh?) Economic recessions are the primary drivers of Bear Markets and as you can see here, they crush stocks. Here’s a quote (and a great chart) from a recent Washington Post article on recessions: “About 40 million U.S. adults haven’t seen a single recession during their working lives. Almost as many, including most millennials, have seen only one since they turned 18. That recession, the devastating Great Recession from December 2007 to June 2009, was (hopefully) not representative.” 

 

Wow, that’s incredible, there are a TON of people who don’t even know what a recession feels like. 

Allow me to make two guarantees right here, right now. The just announced 4th Matrix movie is going to be godawful and there will be another Recession one day. It’s not a matter of if but when, economies move in cycles and every expansion inevitably has a contraction. No one knows when it’s coming and what it will do to the equity market but we do know one thing: preparation will be key to getting thru it.

No recession is the same, they are products of unique circumstances both economically and behaviorally. Billions of dollars of mortgage debt going sour and a wholesale rout of consumers biggest asset (their home) brewed up one of the ugliest periods in stock market history, but just because 2007-2009 was one of the worst recessions ever doesn’t mean the next one will be that bad. Maybe we get a shallow recession caused by a decline in business spending and corporations suffer more than you and I. Maybe it only lasts a few months instead of 12 or 18, who knows, what I do know is that there’s something you can do about it right now.

Financial plans are living breathing things. You don’t create one and then carry it around etched in stone like Charlton Heston. Now is as good a time as any to reach out to your advisor and say “Hey, thanks for all your hard work and caring about my family and their well-being. By the way, what would my portfolio look like in a bear market? What are the various contingencies for our spending if economic worries mount?” You know what those questions are? They are brushing and flossing, using that stupid water thing that gets all over my mirror when I turn it on. It’s preparing yourself for the inevitable day when that next recession arrives. It’s being involved and not letting the winds of fate toss you around like so many dried leaves. 

What’s that? You’re a younger investor who grew up during the GFC and have scars which run deep? Completely understandable, the vast majority of Millennials saw the economy plunge like a meteor and I won’t minimize how that shaped your view of the World. Just remember, time is on your side.  As odd as this sounds you should almost be rooting for lower stock prices because it dramatically shifts the odds of long-term success in your favor. There’s no 15+ year period where the S&P500 total return has been negative so while a recession and a bear market will be scary, they are part of the reason stocks return what they do. Get someone by your side to help you thru the next one, dig thru your spending and see what you would cut out, raise a rainy day fund to buy dips or even a home if mortgage rates plunge. There’s lots you can do right now.

I know that if I just put more effort into preparing for dental visits that things would go smoother but I’m human and stress does weird things to us. We like to pretend that difficult things don’t exist when we can’t see them directly in front of our face. Take the time to prepare yourself for the next economic downturn so when it happens you can look back and say “Thank God Mike’s dental hygiene is so bad otherwise he never would’ve written that blog post which helped me weather this storm”.       

Engage with your advisor right now and if you don’t have one who thinks about markets and investing the right way, the way we do at Baird, reach out and we’ll point you in the right direction. 

R Word

Equities start the day flat as I make my triumphant return to the blogging world. Actually it’s only been a week since my last post, the only people who miss me after a week are…well…let’s move on. What shall we talk about today dear friends? How about the R WORD. Check out how many times the word “recession” has been Google searched over the past 9 days. Incredible, and wholly understandable; we had a Yield Curve inversion that hit the front page of every website known to man including TheYarnBarn.com (yarn prices are economically sensitive, what do you want me to say). Look, here’s the thing with inversions, setting aside how cool it was with Maverick and Goose, they are at best warning signs not red alerts. The last 4 times the 2yr 10yr curve inverted it took, on average, 18 months for a recession to arrive and the market went on to gain 24%, 40%, 32%, and 34%. Does that mean history will repeat and good times inevitably lay ahead? Of course not, nothing is ever the same in markets, which is why good news needs to be viewed as good news. Wait, what? What are you saying Yacht Rock guy? I’m saying that economic data needs to firm up, we can’t look at a miss and say “well that raises the odds of Fed action so whatever, we’ll be fine”. Nope, from now on economic data, particularly in the consumer space, needs to beat expectations or dark shadows will grow. 

Since futures were quiet overnight we spent the early part of today drifting around aimlessly looking for something to talk about. Earnings from a couple retailers (HD, TJX, KSS) was about the only thing worth mentioning so let’s go. HD rose 4.5% to trade close to a new all-time high which, to be honest, sounds like consumers are still spending? Frankly this is the kind of stuff I’d rather be watching: consumer names like WMT, TGT, HD, SBUX, etc. Names that normal everyday people go to that would be impacted by worries about an actual recession and not one just talked about in the media. Other winners: MDT, RTN, DHI, and EA. Losers were KSS, DOW, MKC, CAG, and M. By lunch we were sliding lower, down about three quarters of a percent to 2,901 in the S&P which is precisely where we closed. Overall a boring day but the close was notably ugly. 

Let’s circle back to the R word one last time: the last recession was kicked off by the wholesale destruction of consumer’s greatest asset: their home. What if we do have a recession but this time it’s led by a decline in manufacturing and capital investment and not, you know, trillions in mortgage debt. I’m supposed to believe it will have the same severity because….reasons? I just hate the notion that because we lived thru one of the worst recessions ever that all future recessions will be the same or worse. Yes, a recession will come one day (our view at Baird is that one is NOT imminent) so you know what the best thing you can do is right now? Prepare. Talk to your advisor about what your portfolio might do in a bear market. Talk to them about a spending plan in a tough economic environment. Financial planning is an ongoing thing, not something you fire and forget like a heat seeking missile. Call them up and if you don’t have one shoot me an email, I’ll point you in the right direction! 

Final Score:  Dow -60bps, S&P500 -80bps, Nasdaq -70bps, Rus2k -60bps   

News Highlights:

I have two briefs clips to end on tonight

The first is one of the most beautiful things I’ve ever seen, watch this on as big of a screen as you can.

The second is one of the scariest things I’ve seen in my life.

Have a good night