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.
- Advisors, my friends, are you looking for a book to gift to clients during the Holiday season? Go with this one.
- Guys, are you looking for a pair of pants on the weekend that aren’t jeans or khakis? Something super comfy that you can wear inside and to the store? Buy these.
- Are you looking for the dumbest $60 gift ever? Go here
- Do you want an Apple that lasts 12 months in the fridge? Click here
- You know where all the stock market returns have come from this decade?Nope, not the Fed, they’ve come from improving fundamentals
- You want a good side dish how about Chorizo Brussel Sprouts! My God these were so good
- What are leaders worried about in 2020. Use one of your monthly Bloomberg clicks on this one
- Which Frozen 2 song is better: Show Yourself or Into the Unknown. I think it’s gotta be Show Yourself given its immense emotional weight, but both of these songs are absolutely amazing.
- I’d still screw it up
I’m going to end tonight on quick video with a great plot twist at the end
Have a good night
Thanksgiving is a special holiday for Americans, it began as a day of giving thanks and sacrifice for the blessing of the harvest and of the preceding year. In modern day it has come to represent a time when we get together with family and friends, share a few stories, enjoy a spectacular dinner, and finish with the worst dessert of all time (yea I said it. Pumpkin pie is just cold baby food on a crust). In the spirit of this glorious holiday I wanted to share with you what I’m thankful for, the things that I treasure dearly. Sit down with me, take a giant scoop of stuffing, smother it with gravy, and let me pour my heart into you.
I’m thankful for my family who are my entire world. My wife teaches me love, my children teach me hope, our 4 person circle is all I ever wanted from life. I wouldn’t trade one minute with them for all the money ever printed in the history of the World. A happy family is but an earlier Heaven.
I’m thankful for my parents who guided me, nurtured me, raised me to be who I am today. Parents are incredible creatures who give everything of what they are to their children. Their free time, their money, their wisdom, their guidance. They are not perfect beings but without their chance encounter, without their love for each other, you and I would not exist today. Think about how much a long shot it was that they even met and yet you sit here today because of it.
I’m thankful for Wi-Fi. I mean can you imagine life without Wi-Fi? It connects us, it binds us, it allows us to watch Fail videos at 32k feet. I need Wi-Fi like I need air.
I’m thankful for the fermentation of crushed grapes. Wine, in all its variants, can be a sublime experience magnified by sharing it with friends and family. In Vino Veritas.
I’m thankful for Patagonia and its 100% recycled polyester fleece with sweater-knit face and heathered yarns (I had to).
I’m thankful I found a place to work that I love. Now I’m not just saying this to suck up to my bosses, the unemployment rate is 3.8% I could work lots of place. Baird hired me at the start of the GFC and has been my home for 13 year, they even allowed me to switch roles mid-career. It’s a wonderful firm with incredible leaders and, more importantly, incredibly talented, friendly people. Don’t think you have to be miserable at your job, there are places to work that are truly special.
I’m thankful for my friends many of whom I met at Baird. I didn’t get to choose my family but I did get to choose my friends and they, along with your family, define who you are. They are your life, they share your hopes and dreams as well as your sorrows. Let the wine of friendship never run dry.
I’m thankful for the creativity of others. Whether its movies, music, books, sports, or art, humanity can be an incredible thing. You don’t have to go far to find inspiration whether it be in a song or a well written phrase.
I’m thankful for comedy, for people who are lighthearted. Take your job seriously but not yourself seriously. If there’s one thing this world needs more of its laughter. When I write or create, I’m always trying to make my reader smile or laugh while I educate them and you know what? That’s fine, even as a Market Strategist on Wall St.
I’m thankful for my friend John who passed away this week. He was larger than life, a person who electrified a room when he walked in. When you saw him he always had a great story and a huge smile. He lived life to the fullest and that’s all any of us can do. Cancer may have taken him from this world but his memory will never fade.
Finally I’m thankful to be alive, at this moment in history, with you. We live in incredible times, you could argue the best of times. We have the words knowledge in our pocket, we can fly anywhere on the planet, video chat with anyone on the planet, modern medicine is helping us live longer, infant mortality and extreme poverty are plummeting, Disney+ is only $6 a month. You only look at history thru a tiny keyhole, step back and realize that the world in 2019 is the “future” and you are blessed to be living in it.
Green Like Baby Yoda
If you haven’t subscribed to Disney+ yet what is even happening in your life? It’s like 6 bucks a month for every movie you ever loved as a kid plus a ton that you love as an adult. That’s one less hamburger for crying out loud, get on it! It also has original shows like a brand new Star Wars western called “The Mandalorian.” In it we meet what has to be the most delightful character since Winnie the Pooh: Baby Yoda! Look at this thing, are you joking me, let me buy ALL the toys! This little doughy eyed force user is a wonderful shade of green, green like the money he’s about to dump into Disney bonuses but also green like the stock market in 2019. It’s been awhile since I got down in the muck and told you fine people what’s happening in markets so let’s put on our baby jedi robes, hold out our little hand, and talk stocks!!
The S&P500 hasn’t been down in a pre-election year since WW2 (h/t Ryan Detrick) and barring a “Michael’s grades sophomore year” type collapse, won’t break that streak. As of November 21 (the day before my birthday…so shameless), on a total return basis stocks are up 26.2%. Incredible. But let’s go back to the end of 2018 for a second to make a quick point. The Fed was hiking, a Trade War was in full effect, growth was slowing all over the globe. A 20% selloff (which many people are now calling a bear) was the market telling us that a recession was likely imminent. Luckily for us the Fed jumped into easy mode, the US consumer shrugged it off, and the Trade War got slightly better as the odds of a small deal improved. Remember, stocks discount the FUTURE not the present. Everything inside this box was the market saying “I’m extremely nervous about what’s happening globally” yet we stayed out of the abyss and recently made a new high because things didn’t worsen. We flew close to the ground but didn’t touch it.
Now here's the best part my friends: not only has the S&P500 broken out but so has the World. Take a look at the MSCI ACWI which represents 49 global stock markets (pronounced ACK WHEEE. Maybe the worst name for something since the Tribune company turned into Tronc). What might this index be saying? Well, in my opinion, it’s saying that global growth has likely bottomed and looking into the future it expects things to improve. Could that change on a dime? Of course, markets can always change their mind about the future (esp with this crazy Trade War), but as long as more than just the US trends higher that has to bode well for the new year. In fact, when the S&P is up this much in a year its been positive the next year 71% of the time. Will 2020 be green like Baby Yoda? I sure hope so but there is one thing I am certain of: this little Muppet will be THE hottest toy of the Holiday Season. I gotta get me one!!!!
- Don’t miss my take on the past Decade!
- Or Ben Carlson’s take on the last decade “Shockingly, a vast majority of the gains over the past decade can be explained almost exclusively by improving fundamentals.”
- Everyone keeps talking about the fact that returns over the next decade might be lower because they’ve been so good this decade. Batnick addressed that here: “It’s probable that returns will be lower over the next decade but that doesn’t mean you should stop investing if you can afford to. You may not receive the same level of compensation for each unit of risk, but you spend 100% of the money you don’t save”
- Incredible Disney+ Meme
- After 45.99yrs of life how did I not know this?
- Q: “Mike…I love getting into highly technical economic analysis (said about 5 people ever) what should I be watching right now?” A: I would argue Leading Indicators. I check this link every month and this might be one of my favorite charts.
- Things Michael should’ve invented #85. A swing to enjoy alongside your child? How did I not think of this?
I have a quick final link for you tonight where I guarantee one thing: you’ll gasp
Have a good night
There are things in life that absolutely blow my mind. One of which is just how much being a father changed my life, but there are other things like:
- It’s impossible to hum while holding your nose
- If you put your finger in your ear and scratch, it sounds like PacMan
- There are more ways to shuffle a deck of cards than there are atoms on Earth
- Vending machines are twice as likely to kill you as a shark is.
- The possibility of dying on your way to buy a lottery ticket is higher than the possibility of winning the lottery.
- How big of an economic anomaly WW2 was – via Ben Carlson
There is one fact however that, if I sit and ponder it, seems like it was an incredible long shot. Unless they dramatically revise Q3 2019 GDP lower (it would have to go from 1.9% to negative numbers AND Q4 2019 would also have to be negative) this will be the first decade in United States history without a recession. If I just jinxed it then so be it, I’ll be content with the fact that I’m the most powerful force in economic history, but I doubt I did. Isn’t that crazy? Does that not seem extraordinary to you knowing where we just came from? 2008-2009 was one of the harshest economic periods for our nation ever yet as we sit on the eve of a fresh decade it spawned not only the longest expansion in history but also a 10-year bull market.
Here is the S&P500 since the end of WW2 (using my new favorite service YCharts). There are 10, count ‘em 10 recessions on that chart. Good Times Bad Times as my friends from Led Zeppelin would say.
The biggest worry over the past year or so was that a recession was imminent. A Trade War hit business confidence, the industrial sector slowed, the S&P500 not only fell 20% but essentially went nowhere for over a year, the Fed was hiking, and earnings were slowing. In fact as of Nov 15, 2019 the Atlanta GDP Now estimate is only 0.3% so the slowdown is real. Strategist have been coming out of the woodwork lowering their equity weights and calling for the end of the expansion, the curtain felt like it was falling.
Yet a recession didn’t happen. Why? Because of you (ignore people who say this is all Fed driven) and our technologically advanced, service-based economy. The resiliency of the US Consumer has kept us growing these past 10 years. Everyday Americans and their consumption are not only 70% of the US economy but 20% of the entire planet’s economy and they’ve forged ahead. Now look, that doesn’t mean this current economic slowdown won’t eventually end in a recession. If there’s one thing I’m sure of it’s that there WILL BE another recession in the US one day but that doesn’t change the fact that we didn’t have one this past decade, the first time in our nation’s history.
So, what was the goal of this piece, other than to get you to stick your finger in your ear to see if I was right? First, it’s to remind you that no one knows what the future holds. No one. If you fell prey to pessimism, doubt, or political noise in the past 10 years you potentially missed out on an incredible run. Bad times, like recessions, don’t last forever, and good times DWARF the bad times (credit First Trust). Second, more people wake up every day trying to make the world better than worse, especially in this great nation. That is super hard to bet against. Finally, it’s to remind you that as wealth managers and stewards of our client’s capital, we help keep them on track so they can benefit from decades like these. If we don’t know where the economy or the market is going then the most important thing is how we act in them for that will determine your level of success. Focus on what you can control, ignore the noise, reap the rewards of patience.
What does the next decade hold? I don’t know, but I’m excited to find out and will enter it with optimism about the future as my default setting.
A casual chat about music and Behavioral Finance by Michael Antonelli and John Taft.
Mike: John, do you love Yacht Rock and all the smooth, silky songs from the late 70s, early 80s?
John:What the heck is Yacht Rock?
Mike: Well my friend, Yacht Rock isn't an official musical term so there's no strict definition of what qualifies. It is generally defined as the kind of music that everyone would love hearing if they were out with friends on a boat and the sun was setting and warm breezes were wafting over you as you sipped on cool, crisp chardonnay. (IGN did a decent job explaining it in this article, click here). The kind of songs that come to mind are classics like "Sailing" by Christopher Cross, or "Brandy" by Looking Glass, or the quintessential Yacht Rock song "What a Fool Believes" by Michael McDonald.
Michael McDonald was a legend in the late 70s, early 80s and is the undisputed king of Yacht Rock. Between his work with the Doobie Brothers and his solo performances McDonald has come to epitomize a time when music wasn't produced on a computer, it was hand crafted in studios and jam sessions and enjoyed on tapes and records everywhere.
John: I'm not a big sailor. And I don't particularly like chardonnay. And I can't figure out what your love of mellow elevator songs from the late 70s has to do with me? Or, for that matter, with the markets, investing and behavioral finance, which is supposed to be the topic of these blogs.
Mike: Allow me to tie this together for you. "What a Fool Believes" is not only a top 10 song of ALL TIME, it also describes a number of things individual investors should remember in turbulent times like these.
A fool believes they can time the market: You've seen these stats a million times but if you missed the best 25 days from 1990 to 2018 your return would look no different than that of a 5 yr Treasury bond. Time in the market is better than timing the market. You can't do it. Don't even try.
A fool believes that daily noise matters: I promise you there's an inverse correlation between time spent watching financial news and your investment performance. On a day to day basis, the market is a coin flip to be positive or negative but, as you extend the time horizon, the odds of success move in your favor. Try not to get distracted by noisy headlines and a daily drumbeat of TV "experts" who know nothing about your personal goals and risk tolerance.
A fool believes it's easy to go it alone: Bull markets make everyone feel like an investing genius, you can make bad decisions and the market bails you out. The past ten years have been some of the best in history and while no one knows what the future holds, having someone by your side if things get rough will be extremely valuable.
John: I'm starting to tack with the breeze (to use a sailing term). Here are two things investors should remember:
A fool believes they can get to where they want to go without a map. Disciplined financial planning is the key to identifying and achieving one's lifetime goals. As the saying goes, "If you don't know where you're going, any path will get you there."
A fool believes added returns come without added risk. In this low-interest-rate environment, it's easy to be tempted by the prospect of 7% of 8% yields. Just remember, those kinds of returns are likely to come with substantially higher risks, particularly at a time when stocks and bonds are fully valued.
Mike: Let me hit you with one more before we dock this boat.
A fool believes that investing is more important than personal finance (inspired by my friend Morgan Housel): Control what you can control. In fact obsess over it. You can control your savings and spending but you cannot control what the stock market does. Like my blogging partner said, don't chase risk in the market. Instead focus on your side of the equation where you can get immense leverage. Don't neglect the things you have DIRECT control over.
Well John, I hope my love of Yacht Rock convinced you to give it a go. Not only does the music inspire me but there's lessons to be learned from its lyrics because "it's not far down to paradise, at least it's not for me. If the wind is right you can sail away, find serenity".
If you enjoyed the conversation, you should check out Mike and John's discussion about the most important question Baird's wealth management clients ask.
You can follow John's Blog "Finance for the Greater Good" here: https://johntaft.rwbaird.com/