Frustrated

There are so many things in life that frustrate me, make me pull out my gray hair and curse the star I was born under. When 5 people push 5 different buttons in the elevator I legit enter a mini depression. When someone ahead of me in a supermarket pulls out a check to pay for their $12.50 in oranges and chips I almost want to pay their bill to avoid the anger.  When I roll into a gas station and have to press 48 buttons and enter my social security number before being able to pump gas in 10 degrees, well, yea, Michael is on tilt. You know what seems to be frustrating the most amount of people on Finance Twitter and in the market right now? The fact that it won’t sell off (even Cramer!!!) Let’s dive into that for second…

The Coronavirus outbreak has thrown all sorts of worries into Global growth and economic indicators. China, for all intents and purposes, is running in an idle state. Apple, which has huge exposure to China from both a supply and demand perspective, warned that they likely won’t meet previous guidance. People are screaming in my timeline “how can the market not be selling off on this news, this seems really bad?” Here’s my take: 1) Americans tend not to worry about something until it’s on their shores. For now, the worst of this outbreak is far away and that hasn’t impacted the average consumer. 2) Stimulus. If there is a maximum amount of stimulus possible (good blog here) the market thinks we are likely to see it from China. It’s a centrally planned economy, they could literally backstop everything (there’s already talk they will bail out all their airlines). 3) Previous pandemics have all shown a similar track. Weakness into peak infections then a slow steady climb out of it. Did you know the Spanish Flu of 1918 that killed 50mm people only knocked 10% off the DJIA?

There’s also hand wringing over the 10-year yield, the election, and Boeing. If the market keeps grinding higher why are yields so stubbornly low (1.55%)? Should the market be worried about a particular candidate winning? If one of our great companies is struggling to get back on track what does that mean for not only the manufacturing sector but for GDP growth? All interesting questions but as of now have had zero impact on the rally.

Our investment strategy team does not believe this pandemic will end the bull market but they, like me, acknowledge that we still don’t know the extent of the damage wrought (both economically and in lives lost). That being said, if you are a long-term investor you’re probably thinking that this is 1-2 quarters of weakness but not a game changer for a decade old bull market. While this event represents “True Risk” a durable financial plan is supposed to be built to handle all kinds of twists and turns in the road. 

So yes, people are frustrated the market isn’t selling off but you know what? That’s what markets do, they want to frustrate the most amount of people they can at any given time. If everyone is leaning Bearish, waiting for a pandemic related selloff, a rally is like a slow internet connection, SUPREMELY frustrating. A selloff will happen but only when no one expects it to. Finally, and I can’t emphasize this enough, don’t sleep on whatever the Chinese have planned to stimulate their economy after this event fades, it is likely to be unprecedented. Pandemics that threaten economic collapse also threaten political stability, they can ill afford either. 

News Highlights:

There’s a guy who does Youtube videos called “Midwest guy” and I absolutely love it, he kills me. I can’t believe I haven’t posted his take on Disney yet, check it out here! (his NYC and LA one’s are awesome too)

https://www.youtube.com/watch?v=Zu3cK4Q_6ys

Have a good night.

Wait What?

Every now and then things happen in the World that blow my mind. While each one may not be enough to fill an entire blog post I do think they are worthy of a listicle so let’s dive in to a few things that have me scratching my head while I sit in my fluorescent lit, Ikea inspired office, sipping a grande half ice, half caf, one pump vanilla, ¼ chai, “give me strength to get thru the day” latte.

  1. TSLA. Yep, a car company people love to hate on (and almost no one actually owns) is worth a gajillion dollars as its stock goes parabolic (Baird rates neutral). My entire TWTR timeline is filled with people posting crazy stats about the market cap and how it reminds them of a mania they only read about in a book. Look, here’s the thing, stocks do crazy things from time to time, it’s just part of the whole deal. In 2008 Volkswagen was the biggest company in the world after an epic short squeeze. When will it end? Who knows but the last few times we’ve seen action like this (BYND, TLRY) it occurred close to a short term market peak (@hmeisler did a thread on this here. Credit where credit is due). 
  2. Io-what?  I know you are reading a lot of headlines about the Iowa caucuses but I want you to remember that the election process in the United States is a long road full of twists and turns and it’s way too early for the market to make sense of who the front runners are. As such, the events of last night might make for good political fodder but it makes for almost no market fodder. Always try to separate the signal from the noise when it comes to your money.
  3. Super Bowl Ads – I love Super bowl ads, who wouldn’t wanna watch millions of dollars of creativity jammed into 30 second. So there I was googling “Best Superbowl ads” on Monday excited to see what I missed.  As I clicked the first ad I had to sit thru a different ad to watch an ad. ARRGHGHHH. Come on man (Bill Murray had the best one).
  4. China - No one knows what the final impact of the Coronavirus will be but how crazy is it that we are basically shutting off the Worlds 2nd largest economy? Airlines, borders, rail traffic, all of it is trending towards zero. Strategists sit around looking at technicals and sentiment and economic data but there are NO MODELS that account for sealing off China from the World.  Especially painful as we are seeing a bounce in manufacturing data.   
  5. 1917 - is the favorite to win Best Picture? Really? I love a good War movie, and this one has brilliant cinematography, but the plot is paper thin with very few memorable moments. It should probably be Parasite or Joker.   
  6. The Fed – The Fed is not driving the stock market, the Fed does not have a plunge protection team, The Fed is not the illuminati. Don’t fall prey to hucksters and doomsayers who say the Fed is engaged in “forever QE.”  Yes, the Fed can help create conditions that are beneficial to stocks, their mandate is to ensure full employment and low inflation, but if we boil it down a stock market is composed of two things:  corporate earnings and what people are willing to pay for them. That’s it. Here’s a look at corporate earnings and the price of the S&P500.

Ok, I’ve rambled long enough, 2020 is off to a wild start but you know what? So be it, may you live in interesting times.

True Risk

As the Titanic steamed through the North Atlantic they had crew members constantly scanning the horizon for icebergs. On the sides of the ship, in the wheel house, in the crow’s nest, men spent hours looking for giant chunks of ice that posed a risk to the 2,224 souls on board. As we all know, there was one iceberg they didn’t spot, one that came out of the darkness, one that doomed the luxury liner to become the most famous disaster of all time (did you know Rose says “Jack” 80 times in the movie? Really bugs me for some reason). In my 2020 Outlook to our clients I reminded them that the icebergs Titanic’s lookouts couldn’t see were the one’s that represented true risk. That same thought process is relevant to the market and your investments. I read countless outlooks to start the year talking about the Election, Manufacturing weakness, debt, interest rates, earnings, etc which are all known icebergs. Did a single strategist write about a viral outbreak originating in the 6th largest city in China posing a threat to a tentative global economic recovery? Of course not, but that’s TRUE risk.

Let me put my semi-retired trader hat back on and walk you thru what’s happening right now. A novel virus is expanding its reach thru a city of 11mm people while simultaneously working its way around the globe. We know that China’s economy has been slowing but the market hoped a Phase 1 Trade deal would put it back on track, now that hope might be gone (you gotta read this crazy Twitter thread by my friend Denise Pellegrini of BBRG. Chaos Theory in action). The Iowa caucuses are in a week and the latest polls show Bernie Sanders in the lead. If he wins next Monday and gains momentum in NH the market will need to start discounting the chances that he not only wins the democratic nomination but the Presidency (policies are what the market cares about, not an individual). Finally, let’s face it, we were a bit overbought and overloved, we haven’t had a 1% move since October. Those kind of stretches can happen in a bull market (I wrote about it here) but the flip side is that corrections can come out of nowhere and catch us all off guard. There’s a reason the phrase “stairs up, elevator down” exists.

Ok, so, we know what the market is concerned about right now, what should we do about it? Here’s the thing: when a bridge builder builds a bridge and expects the maximum downward force on it to be 5 tons, she’ll build it to handle 10 tons. When a modern airliner is built its wings are flexed further than any turbulence could possibly flex them. If true risk in the market is something we’ll never see then the best we can do is build our portfolios to withstand a worst case scenario. The longest drawdown in history for an all stock portfolio is 13 years (for the popular 60/40 variant it’s 11 years). Can you handle that? If not then maybe it’s time to re-examine what you’re holding, possibly add more ballast to your portfolio (bonds/cash). There isn’t a single person on the planet that can predict the future, especially with respect to markets and the economy. Preparation is, and always will be, paramount to your well-being.

I’m going to end with just one link tonight, the Oscar winning short film by Kobe Bryant. 

Dear Basketball

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!!!

https://www.youtube.com/watch?v=Ly1xBd4SXFc&feature=youtu.be

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)

https://www.youtube.com/watch?v=NkPIk61pe2g

Have a good night