Bull Market Things

In my previous role inside of Baird, I used to travel to see Institutional clients in Milan and Zurich.  Two wonderful cities separated by the Alps and, you know, a different language and culture.  Anyway, the flight between them is only like 50 mins but you can also travel by train and, my friends, it is spectacular.  A slow, gentle, peaceful trip through the Alps that I would highly recommend to anyone who loves mountains, lakes, and soaking up a few hours of the best scenery in the World.  Unfortunately for me, I was always concerned about meetings or the market or whether I bought the right kind of water because the sparkling and the still bottles looked identical (ugh, I hate sparkling, I feel like sparkling water makes you more thirsty).  That slow, gentle, plodding trip was never truly peaceful for me but by taking those train rides I reaped a prized emotional reward, lifetime memories of Earth's natural beauty.  You know what’s slow, plodding, and peaceful right now?  The stock market.

According to the WSJ, the S&P 500 is in one of its longest streaks without a 1% daily move in the past five decades.   Wow, that is a historic level of calm, take a look at the past few months and tell me that kind of price action isn’t remarkable.  A steady march higher with almost no pullbacks.  Is this kind of thing unusual?   Are we looking at something out of the ordinary?  I’d argue no, this is just how bull markets work, these are BULL MARKET things.  Long stretches of gentle, plodding returns (with corrections along the way) that eventually add up to something big.  Returns compounding on returns.  Dividends compounding on dividends.  Time in the market determining success.  What if I told you we are only 5% away from this becoming the largest bull market of all time? (have to hit 3,498 on $SPX).  We are, because of bull market things.

Economic data this week has all but confirmed recession worries from last year were premature.  Jobless Claims, Retail Sales, Housing Starts, Philly Fed.  All of them showed an economy that continues to wind its way through the mountains of worry.  Have things slowed from previous years?  Sure, of course they have, but they haven’t hit a point where recession calls make sense.  One day they will, and zero people will call it in real-time (people who have been calling it for years get NO credit).  

Let me ask you a question:  If you’ve missed the bulk of the past 10 years, one of the longest most peaceful rallies in history, when would you ever own stocks?   Are you going to be diving in with both hands when it's churning lower in a recession or it goes sideways for years because the economy is running on fumes?   This bull market is going to end one day, that much I’m sure of.  I’m also sure that the people who have been calling for its demise have cost their clients untold sums of money.  No one knows when it will end, there is no magic 8 Ball.  First Trust has the best chart on Bull and Bear Markets so let’s end with this thought:  your train ride thru the Alps of stock markets will always include nervousness and agitation, it will always be beset by the tyranny of pessimists, just don’t forget to look out the window and appreciate the mountains of gains that come from Bull Market things.  

News Highlights:

 Here are three things I love to have in my final link:  Anything with Australians, I love them.  It’s Winter so something with snow.   Then, of course, someone doing something stupid.   I found the trifecta!!!


Have a good night.

Some Things Never Change

When I was a young boy I’d wake up on the weekends, go downstairs, pour a bowl of Cinnamon Toast Crunch (easily the best cereal of all time), watch cartoons (Transformers), and occasionally hear my parents talk about some troubling situation in the Middle East (the one I remember the most is the US shooting down an Iranian airliner). Nowadays on the weekends I walk downstairs, pour a bowl of prunes, glance at my kids on their phones doing Tik Tok dances, and talk to my wife about a troubling situation brewing in the Middle East. This year has started off rather quiet (absent the news we saw last week) so there hasn’t been much to talk to you about. Look, let’s be brutally honest, of all the reasons to worry about the stock market “tensions in the Middle East” has to be pretty far down the list. While some things change in life (what you eat for breakfast, what kids do in the morning) others don’t (Geopolitical risks). If you were to use “potential conflict in a historically volatile part of the World” as a reason to sell stocks you’d almost never be in them. 

Here's the current situation as I see it: The market is probably over loved and over believed yet it doesn’t appear to matter. Sentiment is at an extreme, stocks are overbought, we’re still getting weak manufacturing data (Dec ISM), there’s a spark surrounding Iran, and yet we sit just shy of the all-time high. Why? Well, my best guess is that all that fresh money that needs to be invested when we start a year is counteracting the negatives. IRAs, 401k, pensions, etc, everyone was reset to zero on Jan 1 and that money is trickling back into retirement plans. The problem with early year fund flows is they can run out or get scared out of the market by something that TRULY matters.

You know what’s a bigger threat to stocks than this Iranian kerfuffle? Any kind of consumer data missing. Jobs, spending, homes, etc, if the market smells weakness from what’s been holding up the economy (you, me, your neighbor) it will run home to momma. Of anything out there you need to be concerned about I think this is candidate #1. The US Consumer has been holding the World on its shoulders and that’s where I want you to focus. 

Now look, I might be wrong, maybe early year flows aren’t the reason the market is shrugging off all those things I mentioned earlier. Maybe it’s a muddle thru 2% economy, plus an easy Fed, plus a tailwind from last year, plus TINA, who knows, the point of this is to remind you that the World is and always will be a crazy place. Don’t get caught obsessing over the disaster du jour, they tend to fade into history faster than the team that lost the Superbowl (my pick this year: Ravens v Niners. Ravens win). The market will have a correction this year, I promise you, and the reason will only be known in a rear-view mirror. 

News Highlights:

We’ll end tonight with an amazing trick. I have no idea how he doesn’t spill this (or why he doesn’t chug it at the end)


Have a good night

2020 and Beyond

Traditionally the last few days of the year are spent writing recaps of the previous 12 months while lamenting the fact that the market is dead. As a former trader these days were the worst because fund managers typically don’t do much in the waning hours of a year so you spend most of your day catching up on HR paperwork and compliance exams. But you know what never sleeps? The needs of our private clients, and while volume is low in stocks it is never low in planning. Year-end is as busy as a tree shredder on Dec 26. I’ve already written about the past decade here and about 2019 here (click if you’re a big Star Wars fan) so let’s spend today talking about 2020 and beyond. What should we expect from a fresh year as well as a fresh decade especially in light of such a big gain from the stock market.

Barring something impossible like a meteor hitting NY or me losing any kind of weight, the stock market will end 2019 up nearly 30%. What tends to happen after such a great year? I mean if stocks rose this much they must be due for some kind of pullback right? Well, my friend Ben Carlson wrote about this very thing right here: “Since 1926, U.S. stocks have been up double-digits 54 times (not including 2019). The average return in the year following a double-digit gain was 11.5%.1 The year following those double-digit gains saw positive returns 39 times (72% of the time) and negative returns 15 times (28% of the time)”. 

Look at the part I underlined because that’s where I want you to focus. If you took any given year in the history of the stock market it has been positive 73% of the time and negative 27% of the time (past performance is no guarantee of future results). What you’ll see from Ben’s stats is the exact same number so just because we were up big in 2019 doesn’t mean 2020 has to be down.  This is the beating heart of “evidence-based investing”: we don’t know what the future holds so we try and make high probability decisions based on the data we have.  The years following double digit gains acted no different than any random year. So what about 2020? What should we be on the lookout for?

Given that we have an election next year I’d expect some kind of volatility leading up to the event. The market will attempt to discount the outcome based on what it sees as the likely winner (tidbit: since the end of WW2 no incumbent has lost with unemployment under 7.5%. It’s at 3.5%). Remember: markets care about POLICIES not POLITICS. If it starts to see a high probability of “market unfriendly” policies being enacted then it would start to price that in before the election. Don’t be surprised if random polls are the new trade war headlines (h/t @conorsen).

The economy and earnings will also likely be center stage as they always are. Keep your eyes on Jobless claims, Retail Sales, and New Home Sales because any consumer weakness will rattle the stock market. Also make sure you have one eye on Leading Indicators, especially this 12 months smoothed version (one of my favorite charts). Luckily for us economic data will have easy comps in the first half of the year (given the slowdown we saw in 2019) and the Fed is on the sidelines so I’m content with the way things are shaping up. 

Remember how I said our advisors were busy planning right now? In the end that is and always will be the key to your success. Building a durable plan that you can STICK WITH even if the economy slows and the market sells off is crucial. You know what the longest drawdown has been in the history of the stock market (from the moment the market peaked until you made your money back)? 72 months. Can you and your plan handle 72 months of pain? If a giant bear market starts on Jan 3, 2020 are you equipped to handle it?

I will enter 2020 and the next decade optimistic about not only the World but the country that I love. 76mm Millennials are entering their prime working/home buying/family raising years and that demographic surge makes me hopeful about the next decade. Look, in order to be a stock market investor you HAVE to have some level of optimism about the future. Remember: more people wake up trying to make the World better than make it worse and that, my friends, is worth investing in. 

Good luck in 2020 and stay tuned for more exciting content from your boy BullandBaird! Podcasting? Videos? Heck yea, I can’t wait.

My final link to you in 2019!! People are Awesome!!

The Force

Star Wars Episode 9 opens today and finally ends a 42-year story that quite literally changed the World. If you’ve been following me for a while you know that there are things sacred to me: Patagonia Vests, Baird, Disney, making people laugh while educating them, a nice bottle of wine, demystifying markets, but most importantly a fierce love of the Star Wars franchise. As a child of the 70s, Star Wars movies have been with me my whole life, it’s a saga that spans decades enjoyed by people around the world. Good, evil, the Empire, the Rebellion, droids, ships, creatures, all surrounded by something called “The Force”. Jedi’s use the Force for good, Sith use it for bad, but the Force (when used correctly) allows its user to find peace, strength, and serenity among endless noise and chaos in the Universe. You know who used the Force for good this year? Average ordinary investors like you and me. Allow me to explain why.

Star Wars movies are a lot like investing over the years. Some good one’s (Return of the Jedi, Force Awakens, Rogue 1), some mediocre one’s (Revenge of the Sith, The Last Jedi, Solo), an occasional home run (A New Hope, Empire Strikes Back), and a few disasters (Phantom Menace, Attack of the Clones). You have to take the good with the bad and when you reach the end (Rise of Skywalker) realize that nothing turns out exactly as expected. You have to suffer thru Jar Jar Binks to get Han Solo. Investing is no different.

There were quite literally dozens of reasons to sell stocks in 2019, just think back to how we started the year. The end of 2018 featured a gut wrenching 20% decline and as January was born it felt like entering a football game after having multiple concussions. Strategists were telling people to underweight stocks, the end of the Bull Market seemed near, and investors thought the bounce in January was a trap! (you’re gonna love that chart). Economic data slowed, earnings growth slowed (even went negative in Q3), private markets seemed to peak with the WeWork implosion, a President was impeached, and finally Trade War headlines raged on and on. Yet investors cared not, they crossed their legs, closed their eyes, and used the Force to ignore all that swirled around them. My friends the lessons of this year are numerous and primal. How effectively you shut out that noise directly determined your success in 2019, a year that will likely end up as one of the best in history. Look at the return of some popular names this year, names everyone knows. Disney, the company that owns Star Wars, saw its stock soar 33% this year. Stunning.

I can’t emphasize this point enough. No one knows where the market is going, NO ONE. There will always be a reason to sell (@MichaelBatnick has a great chart about this), there will always be volatility, but how you act amongst all the uncertainty is what will determine your success as an investor. Remember: volatility is your PRICE OF ADMISSION to equity returns, if you can’t stomach the moves than maybe you need to rethink what you’re holding. Did you miss a good chunk of the markets +27% return in 2019 because you got scared by all that noise? Did you try and “time the market” by jumping in and out between 2018 and 2019? Maybe you need help with investing. I know a good place to start, right here. Come talk to our Jedi Advisors and get the wisdom you deserve. 

Ill end today with a 3 minute 34 second scene that is undoubtedly one of the best in history. The lessons taught here work not only in the movie but in our own lives. I mean how amazing is the writing and the music in this scene? Absolutely timeless. Chills even 36 years later.


That Time of Year

As we approach the holiday season I realized that one of the most frustrating periods of my life is upon me. No, not the endless hunt for the perfect present or a radio station that doesn’t play A Wonderful Christmas Time, I’m talking about my wife bringing out towels that for some strange reason I CAN’T USE. That’s right, Holiday Towels, the decorative laced one’s that sit in my bathroom mocking me from their rack. “La La, you can’t use me, your wife will yell at you if you even touch me.” Sigh. It’s a towel for crying out loud, why do they make one’s that are so fancy they don’t even perform their primary function?  I’m raging right now. You know what else is this frustrating? Trade War headlines.  

Stocks fell yesterday because we’re overbought but they accelerated to the downside because of, you guessed it, negative Trade War comments. Like Phil Connors in Punxsutawney Pennsylvania we are never going to escape this story. Endless analysts keep dropping hot takes on us that a “skinny deal will happen” or “a Phase 1 deal is imminent” yet 6:00am hits and the radio plays Sonny and Cher. Again…and again….and again (Is this Bill Murray’s best performance in a movie? I think it may be). 

We need to consider two questions here:1) Will a trade deal ever happen and 2) do we actually NEED one to happen for the market to go higher? I am of the opinion that the Trade War is a lot like the Cold War, an event that is just going to be with us for the foreseeable future, so I don’t think a meaningful deal gets done. My answer to the second questions is “no” with one caveat. I think the economies and stock markets of the World can muddle through as long as the Trade War doesn’t meaningfully deteriorate. It’s like having a head cold.  Sure, you are blowing your nose all the time and your co-workers hate you but you can still do your job and get your kids to swim practice. However, if the head cold turns into pneumonia that’s when things go haywire.

I was asked by my friend Helene Meisler when I would get worried about a selloff. For me it would be a drop thru the old highs which took FOREVER to get through. This level right here because that would imply a failed breakout and a return to hand wringing over Global growth. Let me end with one final thought: seasonality has worked well this year and right now, according to this great chart by Steve Holt, we are in a typically weak period before a final year end push. Again, seasonality isn’t a prediction it’s just how stocks have tended to act historically. Will they reward us with one last bout of holiday joy or frustrate us like decorative towels….MY ARCH-NEMESIS.

News Highlights:

I’m going to end tonight on quick video with a great plot twist at the end


Have a good night